G B Housley Ltd v HM Revenue and Customs

This is an appeal by the appellant taxpayer, G B Housley Limited (“the appellant” or “the taxpayer”) against a judgment (Footnote: ¹ ) of the Upper Tribunal (Tax and Chancery Chamber) (Warren J) dated 13 February 2015 (“the second judgment”) following the hearing of an appeal by the respondents, the Commissioners for HM Revenue and Customs (“the respondents” or “HMRC”), to the Upper Tribunal. The appeal relates to a disputed assessment dated 25 March 2009 (“the assessment”) and made by the respondents under section 73 of the Value Added Tax Act 1994 (“VATA”) in the sum of £337,381 plus interest representing VAT arrears for the periods 1 March 2006 to 31 August 2008.

The judge had given an earlier decision (Footnote: ² ) on the respondents’ appeal (“the first judgment”) in which he had held in favour of the taxpayer, and against HMRC, and affirmed the First-tier Tribunal’s (“FtT”) decision (Footnote: ³ ) dated 15 February 2015 (“the FtT decision”) insofar as it held that the failure of HMRC in July 2009, to consider exercising their discretion under regulation 29(2) (“regulation 29(2)”) of the VAT Regulations 1995, Statutory Instrument 1995/2518 (“the regulations”), to accept, in the absence of proper self-billing invoices, alternative evidence in support of input tax deductions, was unreasonable. The FtT had held, as a result, that the assessment which had been raised against the appellant was invalid and that it should be discharged. Accordingly, the FtT had allowed the appellant’s statutory appeal. However, in the course of the first judgment the judge had raised the issue as to what were the consequences of HMRC’s failure properly to exercise their discretion; in particular, whether the assessment should be discharged or should stand. Because he had not heard argument on the point he adjourned the hearing for further argument.

The second judgment addressed this issue. The judge held (disagreeing in this respect with the FtT) that the FtT should not have allowed the appellant’s statutory appeal. He concluded that the appellant’s statutory appeal should be allowed only in one of the two following circumstances:

HMRC revisited the exercise of their discretion under the regulation and decided to exercise it in favour of the appellant; or

the FtT (or the Upper Tribunal) decided that no reasonable body of commissioners could reach a decision not to exercise the discretion under regulation 29(2) in favour of the appellant.

He expressed the view that the correct course was as follows:

that the appellant should within a particular period of time (to be determined by the FtT) provide any further material to HMRC which the appellant wished HMRC take into consideration when exercising its discretion;

that HMRC should within a particular period of time (to be determined by the FtT) revisit the issue of the exercise of their discretion upon the basis of all the materials then available to it;

for the FtT thereafter, and, if necessary, in the light of any decision made by HMRC, to decide whether HMRC would be acting within the proper exercise of their powers to decide not to exercise their discretion under regulation 29(2) in favour of the appellant.

Accordingly, he allowed HMRC’s appeal and remitted the matter to the FtT for it to make a further decision in accordance with the principles set out in the second judgment. The appellant’s appeal challenges that order.

On the appeal before us, as before the Upper Tribunal, Mr Michael Thomas appeared as counsel on behalf of the appellant and Mr Vinesh Mandalia appeared as counsel on behalf of the respondents.

The following is a summary of the relevant legislative provisions.

The relevant charging provisions are found in section 29 and schedule 11 of VATA and in regulations 13 and 29 of the regulations. Paragraph 2B of schedule 11 to VATA establishes the self-billing regime. Paragraph 2B essentially provides that where conditions imposed by HMRC, either in regulations or in a VAT Notice, are complied with, then a taxable person can provide to himself a self-billing invoice which is treated as if it were the VAT invoice which would otherwise be required to be provided by his supplier.

The regulations contain provisions governing the self-billing regime. Regulation 13(3) provides that “a self-billed invoice”, which is provided by a taxpayer who is a registered person to himself, is treated as a VAT invoice if it complies with both the conditions set out in regulation 13(3A) and any further conditions that may be contained in a VAT Notice published by HMRC. A “self-billed invoice” must purport to be a VAT invoice in respect of a supply of goods and services to him by another registered person. Regulation 13(3A) in turn sets out the three conditions which must be complied with if a self-billed invoice is to be treated as a VAT invoice:

first, it must have been provided pursuant to a prior “self-billing agreement” entered into by the supplier of the goods or services and their recipient which satisfies the requirements in paragraph (3B);

second, it must contain the particulars required under regulation 14(1) or (2);

third, it must relate to a supply or supplies made by a supplier who is a taxable person; in that context, section 3 of VATA provides that a person is a taxable person “while he is, or is required to be, registered…”.

Regulation 13(3B) sets out the conditions for a self-billing agreement. regulation 13(3C) provides that a self-billing agreement is treated as having expired when the supplier ceases to be registered for VAT.

Regulation 29(2) provides that at the time of claiming deduction of input tax a person shall, in respect of a supply from another taxable person, hold the document which is required to be issued under regulation 13. In the case of supplies to the appellant by the four suppliers concerned in the present case, the document was the one which is required under regulation 13, that is to say either an ordinary VAT invoice from the supplier or a self-billed invoice satisfying the three conditions mentioned above. However, regulation 29(2) is subject to this proviso (“the proviso”):

As was common ground between the parties, the effect of regulation 29(2) is that HMRC have a discretion to allow a credit for input tax notwithstanding that the taxable person does not hold a valid tax invoice: see Kohanzad v Customs and Excise Commissioners [1994] STC 967 at 969 per Schiemann J, followed in Best Buys Supplies Ltd v Revenue & Customs Commissioners [2012] STC 885 at [48].

Section 73 of VATA deals with the power of HMRC to make assessments. In so far as material it provides as follows:

Where a person has failed to make any returns required under this Act (or under any provision repealed by this Act) or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him.

In any case where, for any prescribed accounting period, there has been paid or credited to any person—

……

……

……

An assessment under subsection (1), (2) or (3) above of an amount of VAT due for any prescribed accounting period must be made within the time limits provided for in section 77 and shall not be made after the later of the following—

Section 77 sets out the various time limits applying to the making of assessments. In so far as material it provides as follows:

The appellant’s statutory appeal against the assessment lay to the FtT by virtue of section 83(1)(c) and (p) of VATA which, so far as material, was in the following terms:

By operation of section 83A(1) of VATA the respondents were required to offer the appellant a review of their decision and, by operation of section 83F, where, as here, the appellant requested a review:

the nature and extent of the review would be such as appears appropriate to HMRC in the circumstances: see section 83F(2);

HMRC must, in particular, have regard to steps taken before the beginning of the review by HMRC on reaching the decision, and by any person in seeking to resolve disagreement about the decision; see section 83F(3);

the review must take account of any representations made by the appellant, at a stage which gives HMRC a reasonable opportunity to consider them; see section 83F(4);

the review may conclude that the decision is to be upheld, varied, or cancelled; see section 83F(5);

HMRC must give notice of the conclusions of the review and their reasoning within a period of 45 days or such other period as may be agreed; see section 83F(6).

By section 83(F)(8), where HMRC are required to undertake a review but do not give notice of the conclusions within a time limit (45 days or such other period as HMRC and the taxpayer agree) the review “is to be treated as having concluded that the decision is upheld”.

Where there is an entitlement to bring an appeal before the tribunal, sections 83G(3) and (4) provides that an appeal may not be made until the conclusion of any review.

The appellant carries on business as a scrap metal dealer from premises at 404-416 Effingham Road, Sheffield, S9 3BQ. A major part of its business was to buy from smaller merchants and sell to the end users. The appellant was registered for VAT on 1 April 1973 and had been operating a self-billing system since before 1996.

The way in which the appellant operated the self-billing procedure was not in accordance with the rules set out in the regulations. Regulation 13(3A) requires that a self-billed invoice must be provided pursuant to a prior “self-billing agreement” entered into between the supplier of the goods and the recipient which satisfies certain conditions. The appellant’s self-billing arrangements did not comply with the regulations because no self-billing agreements were entered into between the appellant and its suppliers.

According to the appellant:

HMRC were well aware that the appellant was operating a self-billing scheme;

the appellant provided annual lists of self-billing suppliers to HMRC;

the appellant received various visits from HMRC, including a “Full Premises Visit” on 6 March 2007 which indicated that there was nothing fundamentally outstanding; and

when the appellant contracted with a new supplier it telephoned the local VAT Office to check that the supplier’s VAT certificate was correct having first obtained a copy of that certificate.

Nevertheless, the appellant accepted that its self-billing arrangements were fundamentally flawed owing to the lack of any self-billing agreements.

As I have said, it was common ground that the effect of the proviso to regulation 29(2) was that HMRC has a discretion to allow a credit to input tax notwithstanding that the taxable person does not hold a valid tax invoice.

During 2008 HMRC queried the appellant’s ability to recover input tax. On 21 October 2008 the appellant was visited by HMRC Officers as part of a National Scrap Metal Campaign.

In a letter dated 22 October 2008, referring to his visit the day before, one of HMRC’s officer, Mr Day, referred to four suppliers shown in the appellant’s record as having made supplies to the appellant (“the relevant suppliers”). The relevant suppliers had all been de-registered for VAT by HMRC as a result of its investigation into scrap metal merchants. Mr Day considered the invoices from the relevant suppliers to be invalid for the reasons which he set out. Mr Day relied on a number of factors. They can be summarised as follows (although not every feature applied in every case):

supplier deregistered (all cases, although not all supplies post deregistration in some cases);

address on self-billed invoice incorrect:

no other documentary evidence provided (i.e. to demonstrate supply made or made by a taxable person);

the appellant had not visited any of the premises of the supplier (all cases);

the goods were not believed by the appellant to have been stolen (all cases).

In the letter, Mr Day referred the appellant to the HMRC guidance “VAT Strategy: Input Tax deduction without a valid VAT invoice Statement of Practice – March 2007” (“the Statement of Practice”). Mr Day advised the appellant that it should obtain “valid evidence to reclaim the amounts shown in your records” and that “if satisfactory evidence could not be obtained, paragraphs 17 onwards of the Statement of Practice should be followed” pointing out that “this should be done if you wish HM Revenue & Customs to consider exercising its discretion in allowing your input claims”. The relevant paragraphs essentially say that the taxpayer will need to provide alternative evidence to show that the supply had been made.

Following correspondence over a period of several months, on 18 March 2009 Mr Day wrote to the appellant, reiterating his conclusion that the relevant invoices were invalid for the reasons which he had previously given (“the March 2009 decision”). He stated that he had attempted to visit the premises relevant to two of the relevant suppliers, and had concluded that they did not operate from the address shown on the self-billed invoice. Mr Day was clearly alive to the existence of the discretion for HMRC to allow deduction notwithstanding the absence of an invoice. He wrote, clearly with the Statement of Practice in mind:

On 25 March, 2009 the assessment was issued by the respondents, acting by Mr Day, pursuant to section 73 of VATA. In substance, the assessment was a rejection of the appellant’s claim to recover input tax in respect of the supplies made by the relevant suppliers during the relevant period (viz. the periods between 1 March 2006 and 31 August 2008) on the grounds that there were no self-billing agreements in place at the material time between the appellant and those suppliers.

However, HMRC did not reject the input tax which the appellant had reclaimed in respect of its other suppliers, notwithstanding that the self-billing procedure was equally flawed in relation to them.

On 8 May 2009, the appellant’s representatives, its accountants, Hart Shaw, wrote to HMRC expressing their disagreement with the decision and asking for a review of the case by an independent officer.

The requested review was carried out by the respondents’ review officer, Mrs H J Thomas, who wrote to Hart Shaw on 2 June 2009, confirming the previous decision. Mrs Thomas based her conclusion on the absence of any self-billing agreements. Mrs Thomas did not go on to the next stage and ask herself whether HMRC’s discretion to allow the input tax deduction should nonetheless be exercised.

Hart Shaw responded on 25 June 2009 and asked Mrs Thomas to reconsider her decision. In a lengthy letter, they addressed a number of issues which they claimed were relevant to the exercise of the discretion, repeating matters which had already been raised with Mr Day. As part of this letter they identified evidence of supplies taking place and enclosed with their letter a set of answers to the standard questions set out in Appendix 2 to the Statement of Practice.

On 3 July 2009 Mrs Thomas replied to that letter informing Hart Shaw that there was no mechanism for a reviewing officer to undertake a further review and that new or further information should be referred to the original decision maker.

Hart Shaw duly wrote to Mr Day on 10 July 2009. Their letter repeated much of the contents of the letter which they had written to Mrs Thomas following her review and attached the same answers under Appendix 2 to the Statement of Practice.

Mr Day replied on 17 July 2009 (“the July 2009 decision”). He accepted that the conditions in paragraph 5 of HMRC’s Statement of Practice, which sets out the requirements to be met for input tax to be incurred, were satisfied. However, he wrote that the appellant’s input tax deduction had been disallowed as the appellant:

By notice of appeal dated 14 August 2009, the appellant appealed against the assessment dated 25 March 2009 in the sum of £337,381 seeking the result “that the assessment should be wholly withdrawn.” The stated grounds were that:

The appeal was heard in the first instance by the FtT on 22nd January 2013 before Tribunal Judge Mr. David Porter, sitting with a member, Ms Susan Stott. Its judgment was released on 15 February 2013.

HMRC’s primary argument was that the appellant’s case was untenable because, as it did not have self-billing agreements in place, the exercise of the discretion under regulation 29(2) could not be called in aid. The FtT rejected this submission. (HMRC abandoned the submission before the Upper Tribunal which endorsed the FtT’s conclusion on this point: see the first judgment at paragraph 53.)

In relation to the question of the exercise of the discretion under regulation 29(2), the FtT concluded, having heard Mr Day cross-examined, that Mr Day had not considered exercising the discretion under regulation 29(2). Thus at paragraph 32 of the FtT decision, the FtT stated:

Finally, at paragraph 59 of its judgment, the FtT concluded:

The FtT did not differentiate between the March 2009 decision and the July 2009 decision. Its conclusion (based on Mr. Day’s cross-examination) appears to have been that at neither date did Mr. Day consider exercising the discretion because he considered all of the appeal invoices were invalid because no self-billing agreement was in place.

Accordingly, the FtT allowed the appellant’s appeal. That was on the basis that HMRC had acted unreasonably in not considering the exercise of their discretion, not because they had, upon actual exercise of the discretion, reached the wrong answer. The result, according to the FtT, was that that failure rendered the assessment invalid per se; see the FtT decision at paragraph 59.

However, Mr Thomas apparently submitted that the FtT also appeared to have accepted the appellant’s argument (Footnote: ⁵ ) that, had HMRC considered the exercise of its discretion, “the natural conclusion of any reasonable body of Commissioners would [have been] to allow deduction of the input tax in question”. (Footnote: ⁶ )

In order to understand precisely what the FtT did actually decide it is necessary to set out the relevant paragraphs of its judgment setting out its decision:

HMRC appealed the FTT’s decision to the Upper Tribunal.

In contrast to the FtT’s decision, the Upper Tribunal held that, in relation to the March 2009 decision, Mr Day had actually exercised the discretion, but not in favour of the appellant. In this respect the judge stated:

However, in relation to the July 2009 decision, as I have already stated, the Upper Tribunal by the first judgment, affirmed the FtT’s decision that the failure of HMRC to consider the exercise of its discretion in July 2009, having embarked upon a review, was not reasonable; see paragraphs 53, 65 and 75 of the first judgment. In the alternative, the Upper Tribunal concluded that, if Mr Day had exercised the discretion in July 2009, his decision was nonetheless flawed because it was based “almost entirely on the absence of any self-billing agreement”. The Upper Tribunal also rejected HMRC’s argument that their decision would necessarily have been to refuse to allow the deduction of input tax had they approached the matter correctly: see paragraph 67 of the first judgment.

Nevertheless, the Upper Tribunal rejected the appellant’s submission that, in light of the above, the correct conclusion, as reached by the FtT, was that the appellant’s appeal should be allowed and the assessment discharged: see the first judgment at paragraphs 74 and 75. The Upper Tribunal decided instead that HMRC should now exercise, or re-exercise, their discretion to determine whether the appellant should be allowed to deduct the relevant input tax, in the light of the totality of the evidence available at the time of the exercise of the discretion and that a further hearing should be fixed to determine whether or not, absent agreement, the assessment should be discharged: see paragraphs 11 and 66 to 76 of the first decision.

The Upper Tribunal based its conclusions partly on a finding that the appeal concerned not only the exercise of HMRC’s discretion in July 2009 but also the exercise of that discretion in March 2009 following which the assessment was made: see especially at paragraphs 59 and 74 of the first judgment. As the Upper Tribunal recognised, it did not hear arguments on this point because it raised the point itself following the decision in relation to the exercise of the discretion, which decision was made after the hearing: see paragraphs 74 and 75.

Thus the judge left open, for further argument, whether the consequence of his decision should be that the appellant’s statutory appeal should be allowed with the result that the assessment should be discharged. To follow the judge’s thinking in this respect, it is necessary to cite paragraphs 11 and 66 to 75 of the first judgment:

Following release of the first judgment, a further hearing was held before the Upper Tribunal on 16 January 2015 to determine whether the assessment should be discharged.

HMRC essentially submitted that the assessment should not be discharged because they had exercised their discretion in March 2009. They also contended that the proper remedy was for the matter to be remitted to HMRC for the decision to be remade. HMRC further submitted that the July 2009 decision made by Mr Day was not the relevant decision as it was made following the end of the review process.

The appellant, on the other hand, essentially argued that the assessment should simply be discharged and that any decision made by HMRC in March 2009 was irrelevant as the appeal was against the decision as it stood, following the outcome of the review.

As stated above, the judge, however concluded that the matter had to be remitted to the FtT for it to decide whether HMRC would be acting within the proper exercise of their powers to decide not to exercise their discretion under regulation 29(2) in favour of the appellant: see paragraph 63 of the second judgment. He expressed the view that the appellant’s appeal could only be allowed in one of the two circumstances referred to in paragraph 3 above: viz. either because HMRC would revisit the exercise of their discretion under regulation 29(2) and decide to exercise it in favour of the appellant, or because the FtT or the Upper Tribunal would in the future decide “that no reasonable body of Commissioners could reach a decision not to exercise the discretion [in Regulation 29(2)] in favour of [the appellant]”.

On the question of whether or not the March decision was valid, the Upper Tribunal concluded that this question did not need answering. If HMRC could now properly refuse to exercise the discretion, then the March decision could not be invalid. Whereas, if HMRC could not now properly refuse to exercise the discretion in favour of the appellant, then it was irrelevant whether the March decision was valid or not: see the second judgment at paragraph 62.

I set out the relevant paragraphs of Warren J’s judgment in relation to the issue which arises on the appeal (paragraphs 8 - 12, 41 - 43, 44, 45, 46, 47, 48, 51, 61 and 68):

Accordingly, the judge allowed HMRC’s appeal and remitted the matter to the FtT. By a decision dated 17 March, 2015 he gave the appellant permission to appeal to this court on the basis inter-alia that the proposed grounds of appeal had a real prospect of success and also raised “an important point of principle concerning the powers of a tribunal when exercising its supervisory jurisdiction”.

In summary, Mr Thomas submitted that the appellant’s primary case was that:

I interpose to say that, in my view, Mr Thomas’ formulation of what he says that the Upper Tribunal decided (as highlighted by me in bold) is not strictly accurate. Warren J did not decide “that HMRC had acted unreasonably in not exercising their discretion under Regulation 29(2) to accept, in the absence of proper self-billing invoices, alternative evidence in support of input tax deductions in July 2009”; on the contrary, the judge decided that in July 2009 Mr Day had failed to consider the exercise of the discretion under the proviso at all, because of his mistaken view as to his ability to exercise the discretion in the absence of self-billing agreements. The judge did not decide that HMRC was unreasonable in not accepting the appellant’s alternative evidence. However, nothing turns on this.

In the alternative Mr. Thomas submitted:

In support of the appellant’s primary case, Mr Thomas submitted in summary as follows:

The Upper Tribunal had failed to appreciate that its jurisdiction was appellate and that its role was to review the decision which HMRC had made. Thus although the test to be applied when considering whether HMRC’s discretion has been properly exercised was a supervisory one, nevertheless the jurisdiction exercised by the tribunal remained appellate. Accordingly, the issue was simply whether the assessment was valid. Where regulation 29(2) was in point, that would depend upon whether HMRC had acted in a way in which no reasonable panel of Commissioners could have acted. If HMRC had not so acted and the decision would not inevitably have been the same had they acted correctly, then the appeal had to be allowed: see the Upper Tribunal’s decision in Best Buys Supplies Ltd v Revenue & Customs Commissioners (especially at paragraphs 48 to 57) where John Dee was applied. Best Buys Supplies also concerned HMRC’s discretion under regulation 29(2). The tribunal had no power to direct HMRC to review the original decision and could only allow or dismiss the appeal. The role of the tribunal was to decide contested appeals.

Accordingly, once a tribunal had decided, following the tests prescribed by John Dee, both that the exercise, or the non-exercise, of the discretion was totally unreasonable and that the result would not have inevitably been the same had HMRC exercised their discretion properly, then the only possible outcome was that the appeal must be allowed and the assessment discharged.

Moreover, the supervisory jurisdiction had to be exercised in relation to materials which were before the Commissioners and not later materials: see e.g. Kohanzad [1994] STC 967 per Schiemann J at 969d-f; Customs & Excise v Commrs v Peachtree Enterprises Ltd [1994] STC 747 at 751 e-h. In directing that the FtT should take account of all available material in respect of a further decision which HMRC might make, as well as that further decision itself, the Upper Tribunal had made an error of law.

Although the Upper Tribunal correctly recognised that HMRC could not be directed to reconsider the exercise of their discretion, the Upper Tribunal had effectively decided that the discretion should be reconsidered afresh. That was a result which was simply not open to it.

The Upper Tribunal had effectively created a jurisdiction to direct the Commissioners to carry out a further exercise of their discretion which was then to be scrutinised by the FtT. Such a jurisdiction required a specific statutory basis, as existed in section 16(4)(b) Finance Act 1994 in relation to non-restoration cases under the customs duties legislation. In the absence of such a statutory basis it was not open to the tribunal to direct the Commissioners to carry out a further review. No such jurisdiction existed here and the Upper Tribunal had erred in law by effectively creating one.

Having HMRC’s discretion reconsidered at this stage was also impractical and would be unfair. It was now nearly 6 years since HMRC made its decision on review. The appellant’s key director had since been affected by serious ill-health.

The Upper Tribunal had effectively reversed the applicable test as set out in John Dee. The issue was whether HMRC had acted in a way in which no reasonable panel of commissioners could have acted. Once that test had been satisfied by the taxpayer then HMRC could only escape the appeal being allowed if they could show that the decision would inevitably have been the same had the discretion been properly exercised. It was common ground that this exception did not apply in the present case.

However, the Upper Tribunal had effectively and wrongly reversed the exception recognised in John Dee, so that the taxpayer must in this case now demonstrate that no reasonable body of Commissioners could refuse to exercise their discretion under regulation 29(2) in the taxpayer’s favour if the appeal is to be allowed. There was no basis in law for removing the obligation on HMRC to show that their decision must inevitably be the same, if their discretion were to be re-exercised, and imposing the burden on the taxpayer to show that the discretion must be exercised in its favour.

The Upper Tribunal had drawn a false distinction in its reasoning between what it called “process defects” and “merits defects”. There was no basis for such a distinction between process defects and merits defects

In the event that the appellant’s primary submission (viz. that the Upper Tribunal failed to apply the correct test) failed, then, in the alternative, Mr. Thomas submitted as follows:

The Upper Tribunal failed to apply its own test correctly. The issue which the Upper Tribunal identified as requiring an answer was whether HMRC would be acting within the proper exercise of their powers not to exercise the discretion under regulation 29(2) in favour of the appellant: see the second judgment at paragraph 62. As the Upper Tribunal said, the appellant must succeed if it was able to show, on all the material available on the review, that no reasonable body of Commissioners could refuse to exercise their discretion in the appellant’s favour.

The appellant passed this test. Both in a letter dated 17 July 2009 and at the hearing before the FtT, Mr Day, on behalf of the Commissioners, stated that he accepted that the conditions in paragraph 5 of HMRC’s Statement of Practice, which set out the conditions to be met for input tax to be incurred, were satisfied: see the FtT Decision at paragraphs 29 and 30.

Moreover, the right to deduct input tax was an integral part of the VAT scheme and in principle could not be limited: see Dankowski v Dyrektor Izby Skarbowej w Lodzi [2011] (Case C-438/09) All ER (D) 01 at paragraph 22.

Had the Upper Tribunal correctly applied its own test then it would inevitably have allowed the appeal on the basis that the discretion could only be exercised in favour of the appellant.

On behalf of HMRC Mr Mandalia supported the approach taken by the Upper Tribunal. He submitted that the Upper Tribunal had correctly stated the position in paragraphs 11 and 73 of the first judgment (Footnote: ⁸ ) , namely that, since the tribunal’s jurisdiction was only supervisory, and given that HMRC had not exercised their discretion properly (by failing to exercise it at all), the result was that the discretion had to be exercised afresh by HMRC, not by the FtT or by the Upper Tribunal.

In support of the argument that the FtT’s jurisdiction over decisions by HMRC to disallow claimed input tax not covered by valid invoices was supervisory (in that the Tribunal could not substitute its own decision but only decide whether the HMRC’s discretion had been exercised reasonably), Mr Mandalia relied upon the decision in Best Buy Supplies Ltd. He said that, upon finding unreasonableness, the Tribunal was entitled to apply the test in John Dee Ltd and determine whether HMRC’s decision would inevitably have been the same had the discretion been reasonably exercised.

In the present case Mr Mandalia submitted that it could not be said, if it had exercised the discretion, that HMRC would necessarily have come to the same conclusion; it was for that reason that the Upper Tribunal correctly remitted the matter for a further hearing, since it was not possible on the evidence currently before the court to come to a conclusion what HMRC's view would have been.

Mr Mandalia submitted that it was not open to the Tribunal simply to allow an appeal because a Tribunal was not satisfied that the HMRC’s decision would inevitably have been the same. That would involve the Tribunal effectively standing in the shoes of the primary decision maker and exercising a fresh discretion in the way that the Court of Appeal had held was not permissible. It was entirely logical that, in those cases where it was shown that, had the additional material been taken into account, the decision would inevitably have been the same, a Tribunal could dismiss an appeal. The test of ‘inevitability’ was a high one, and there was nothing to be gained in such cases by remitting the consideration of the discretion back to HMRC; the exercise of discretion in such cases, would inevitably, and properly, be the same. However, the same could not be said in cases such as the present one, where HMRC might have taken one of a number of different courses, had they exercised their discretion.

It was therefore entirely appropriate to draw a distinction between a ‘process defect’ and a ‘merits defect’, as Warren J did in this case. Here, neither the FtT nor HMRC had properly considered what the outcome would have been in the event that the discretion had properly been exercised. Rather, HMRC had, in reaching their decision, erroneously proceeded upon the premise that they could not exercise any discretion in the absence of a self-billing agreement. At paragraph 66 of its first decision, the Upper Tribunal had correctly noted that;

Mr Mandalia further submitted that for the reasons set out at paragraphs 67 and 68 of the first judgment of the Upper Tribunal, it was far from clear what the outcome might be. Accordingly, he submitted, that, as adopted by Warren J, the proper course was for the matter to be remitted to the FtT for it to decide whether HMRC would be acting within the proper exercise of their powers to decide not to exercise their discretion under Regulation 29 in favour of the appellant. Mr Mandalia sought to draw an analogy with the procedure adopted in immigration cases such as Secretary of State for the Home Department v Abdi [1996] Imm AR 148. Thus, he submitted, Warren J was correct to conclude that HMRC should be afforded an opportunity to consider whether to revisit the exercise of their discretion. If they were to do so, and exercise their discretion against the appellant, the FtT’s enquiry should focus on that decision, and all of the material on which it was properly to be based, which would not suffer the same ‘process defect’ as their previous decision. In those circumstances Mr Mandalia submitted that this court should dismiss the appeal.

The difficulty in this case arises from the fact that (as we were informed by counsel) there is no express statutory articulation of the powers which a tribunal can exercise when deciding in favour of a taxpayer on its appeal under section 83. (Footnote: ¹⁰ ) In any event, we were not referred to any such provisions. However, it is clear, as was common ground, that the jurisdiction which the tribunal was exercising under section 83 was an appellate jurisdiction. It was also common ground that, based on decisions such as Customs and Excise Commissioners v JH Corbitt (Numismatists) Ltd [1981] 1 AC 22 at 60B-61B; Customs and Excise Commissioners v Peachtree Enterprises Ltd supra at 751b-h; Kohanzad supra at page 969; and John Dee supra at 952a – j, that, in relation to the issue as to whether HMRC had exercised its discretion under regulation 29(2) either properly, or at all, the function of the tribunal was supervisory; that is to say, that the tribunal could not (subject to the points made in paragraph 69 below) substitute its own views, in place of HMRC, as to the merits as to whether the discretion under regulation 29(2) should (or should not) be exercised in favour of the taxpayer.

The following propositions were also common ground:

If HMRC had unreasonably failed to exercise their discretion at all, or had wrongly failed to take relevant material into account, then a tribunal could nevertheless dismiss a taxpayer’s appeal if, on a proper exercise of the discretion, HMRC would inevitably have decided the same thing – i.e. in the present case, have declined to have exercised the discretion under regulation 29. That proposition was based on this court’s decision in John Dee supra at 953 and the decision of the Upper Tribunal in Best Buy Supplies supra at [50] – [56].

If the tribunal was of the view that, on the basis of the material before HMRC, no body of Commissioners could reasonably have come to any conclusion other than to exercise the discretion under regulation 29 in the taxpayer’s favour, then the tribunal should/could have allowed the taxpayer’s appeal.

Therefore, the battle lines in the present case, at least in the argument before us, were focussed on the following issues:

Had (as Mr Thomas for the appellant apparently submitted, and Mr Mandalia for HMRC challenged) the FtT actually decided that, on the basis of the material before Mr Day, no reasonable body of Commissioners would have been entitled to come to any conclusion other than to exercise the discretion under regulation 29 in the taxpayer’s favour? The Upper Tribunal concluded that the FtT had not so decided: see paragraphs 54 to 59 of the first judgment.

If the FtT had not so decided, was the FtT nonetheless (a) obliged or (b) entitled to allow the taxpayer’s appeal and discharge the assessment, leaving HMRC, if they were entitled to do so within the time limits prescribed by sections 73 and 77 of VATA, to raise a further assessment? (Footnote: ¹¹ )

Or, in the alternative to ii) above, if the FtT had not so decided, should it have adjourned the appeal, without discharging the assessment, so as to give HMRC an opportunity to revisit the exercise of their discretion under regulation 29(2) on the proper basis, viz. that the absence of self-billing agreements did not per se preclude the exercise of the discretion in the taxpayer’s favour?

In the event that iii) was the correct course, should the HMRC have been invited to do so (as the Upper Tribunal did) on the basis of all appropriate available materials, upon which either party might want to rely at the time of such re- exercise or merely on the basis of the materials which were before HMRC in July 2009? If so, should the discretion have been exercised in favour of the taxpayer.

With respect to Warren J, I do not find his distinction between “process” defects and “merits” defects very helpful. Often it will be difficult to draw the line between the two. The Upper Tribunal’s proposition at paragraphs 44 and 45 of the second judgment that, in the case of a merits defect, it inevitably follows that the discretion is to be treated as having being exercised in the taxpayer’s favour so that the appeal must be allowed, is difficult to understand. Just because HMRC have made a decision which is perverse does not predicate that the taxpayer is entitled to have the discretion exercised in his favour to the full extent claimed. All that follows from either a process defect or a merits defect is that the decision has not been properly made.

In my judgment the decision of this court in John Dee is instructive as to the correct approach on appeals of this sort. In that case this court had to consider an appeal under what was then section 40(1)(n) of the Value Added Tax Act 1983. Section 40 was in similar terms to section 83 of VATA in that it provided for appeals against a variety of the Customs and Excise Commissioners’ decisions (“the Commissioners”) including assessments and the amount of any input tax. Section 40(1)(n) provided for an appeal against any decision by the Commissioners that a taxpayer should be required to provide security for the payment of any VAT which either was or might become payable. At the material time the power to require security was contained in para 5(2) of Sch 7 to the 1983 Act. The relevant provision was in these terms:

The Court of Appeal dismissed the Commissioners’ appeal. Neill LJ (with whom Roch and Hutchinson LJJ agreed) quoted from the passage in Turner J’s judgment (at 269) where the latter had identified the issues of law for his determination as follows

Neill LJ then summarised the conclusions reached by Turner J as follows:

Neill LJ then went on to express his reasons for agreeing with Turner J’s analysis of the function of the tribunal in a case involving an appeal from a discretionary decision of the Commissioners:

Thus the Court of Appeal endorsed the approach adopted by Turner J namely that, save in circumstances where the Commissioners could show that, had the additional material which should have been taken into account, in fact been taken into account, the decision would inevitably have been the same, where a tribunal could nonetheless dismiss the taxpayer’s appeal against a wrongly made decision of the Commissioners, the taxpayer’s appeal should be allowed and that it was not for the tribunal to re-exercise the discretion. The tribunal should have allowed the taxpayer’s appeal and “left it to the Commissioners to take a fresh decision if they thought fit on the facts as they had become by the date of the fresh decision.”

In the subsequent case of Best Buys Supplies Ltd v Revenue & Customs Commissioners supra, the Upper Tribunal (Tax and Chancery Chamber) followed the Court of Appeal’s approach in John Dee – interestingly in a case involving an appeal under section 83(1)(c) and (p) of VATA in respect of a discretionary decision of HMRC under regulation 29(2) to refuse to allow input tax. That case is not binding on us but it is nonetheless indicative of the practice of the Upper Tribunal. In that case the Upper Tribunal was not satisfied that the FtT had established the necessary facts for determination of the question whether HMRC’s decision would inevitably have been the same (i.e. adverse to the taxpayer), had HMRC exercised its discretion properly. Accordingly, the Upper Tribunal remitted the matter to the FtT to establish on the evidence the answer to that question. That was not the position in the present case where there was no dispute that HMRC could not demonstrate that their decision would inevitably have been the same.

In my judgment a similar approach to that adopted by this court in John Dee is applicable to a case such as the present, where the relevant decision was a failure by HMRC, as a result of a misapprehension as to the necessity of a billing agreement, to consider the exercise of their discretion under regulation 29(2) to allow input tax. The present case was one where, on the findings of fact by the FtT, HMRC clearly could not have suggested that, if they had properly considered or re-considered the exercise of their discretion under regulation 29, they would have inevitably have come to the same result – i.e. to have refused to allow the credit for the input tax. Indeed, Mr Mandalia did not seek so to argue.

Now, of course, in John Dee the appeal was not, as in the present case, against an actual assessment or in respect of the amount of any input tax which might have been credited to the tax payer. But, in my judgment, it follows from the approach in John Dee that, if the appellant’s appeal against the assessment is to be allowed, on the grounds that HMRC wrongly failed even to consider the exercise of the regulation 29(2) discretion, then necessarily – since the appeal is against the assessment itself – the assessment falls to be discharged, leaving HMRC, if they wish to do so, to consider the proper exercise of their discretion on the correct legal basis and, if they are able (given the statutory time constraints), to issue a new assessment if so advised. It follows that, in my judgment, the Upper Tribunal was wrong to have allowed HMRC’s appeal against the FtT’s decision, and, effectively, to have given HMRC a further opportunity retrospectively to have justified their assessment.

The directions given by the judge (viz. allowing HMRC’s appeal and remitting the appellant’s appeal against the assessment to be further considered by the FtT, once HMRC had considered or re-considered the exercise of its discretion, potentially on the basis of further materials), in my judgment and as Mr Thomas correctly submitted, wrongly preserved the existence of what had been found to have been a flawed assessment; it wrongly placed the burden of challenging any revised assessment on the appellant, without affording the latter the opportunity to raise the time-bar possibly available to challenge any new assessment raised by HMRC. It also wrongly enabled HMRC to support the correctness of their earlier July 2009 decision by reference to subsequent factual materials, which in itself was not legitimate: see Customs & Excise v Commrs v Peachtree Enterprises and Kohanzad supra. Once the earlier decision to raise the assessment had been found to be flawed, then the appeal against the assessment should have been allowed, the assessment should have been discharged and HMRC - if they were so minded and entitled - should have started again.

Thus I do not, with respect, agree with the judge’s “starting point” that “the assessment is valid unless and until it is shown that the taxpayer is entitled to have the discretion exercised in his favour” (Footnote: ¹² ) . Moreover, why, in the event that HMRC declined to revisit the exercise of its discretion at all, as the judge envisaged in paragraph 48 of the second judgment, should the appellant be required to continue with the appeal proceedings and to surmount the further hurdle (after all these years) of demonstrating at a yet further hearing that on the materials no reasonable body of Commissioners could refuse to exercise the discretion in its favour?

But even if I am wrong in my conclusion that, since the appeal was against the assessment itself, the outcome was necessarily that the appeal should have been allowed and the existing assessment discharged, then it seems to me that the alternative analysis is that the FtT had a discretion as to whether to allow the appeal and to discharge the assessment, or to adjourn the proceedings pending the exercise or re-exercise of HMRC’s discretion. I would base this view on the dictum of Neill LJ in John Dee at page 952h that:

However, contrary to Mr Thomas’ further submissions, I do not agree that this was a case where the appellant was entitled to a declaration to the effect that, if HMRC had properly exercised their discretion in July 2009, no reasonable body of commissioners could have come to any conclusion other than that the discretion should be exercised in the taxpayer’s favour. Like the judge I am not persuaded that, read in context, the sentence in paragraph 58 of the FtT’s judgment:

For the above reasons, I would allow the appellant’s appeal against the Upper Tribunal’s order. I would restore the order of the FtT allowing the appellant’s appeal against the assessment and I would discharge the assessment. It will be a matter for HMRC as to whether, in all the circumstances, they consider it appropriate to seek to raise a further assessment and a question of law as to whether they have power to do so, given the passage of time and the statutory time constraints. I say nothing about those issues.

I agree.

I agree with Gloster LJ that this appeal should be allowed and the assessment of 25 March 2009 set aside in accordance with the decision of the FtT. The Upper Tribunal concluded that in relation at least to the July decision there had been no exercise of the Regulation 29(2) discretion because of a belief that the power was not exercisable in the absence of the necessary self-billing agreements and that this amounted to an error of law. There is no statutory right of appeal against a refusal to exercise the discretion or even an exercise of the discretion and the March and July Decisions are not therefore themselves under appeal. The appeal is against the assessment whose validity depends upon the proper exercise of the powers under the 1995 VAT Regulations. I agree with Gloster LJ that the distinction which the Upper Tribunal made in this regard between merits and process defects is difficult to follow and is apt to cause confusion.

In these circumstances, I consider that the Upper Tribunal was wrong to hold that because there had been no complete determination as to how the discretion would have been exercised following the review this somehow justified remitting the matter back to the FtT for a determination of that matter. The FtT had already determined that there had been no proper exercise of the Regulation 29(2) discretion and HMRC could only preserve the assessment by demonstrating that had the discretion been exercised the result would inevitably have been the same. This they were unable to do.

These considerations apply a fortiori to the Upper Tribunal’s decision that HMRC should be allowed to re-consider and, if necessary, re-exercise the discretion prior to any final determination of the appeal. It is not clear to me what power the Upper Tribunal thought it was exercising and its approach was wrong in principle. If HMRC had not lawfully exercised its powers under the Regulations then the assessment was invalid and it cannot be validated retrospectively by a re-exercise now of the discretion. The only legally relevant re-exercise of the Regulation 29(2) discretion would be in the context of a new assessment.