Natural Balance Foods Ltd v The Commissioners for HMRC

The Appellant contends that documents relating to the July 2023 amendments to HMRC’s Manual VFOOD6200 are necessary for the fair and just determination of the appeal. The amendments concern HMRC’s approach to flapjacks and are directly relevant to the pleaded issues, including the meaning of “cake” for VAT purposes and the legitimate expectation arising from HMRC’s public guidance. The Appellant asserts that the Tribunal must have access to all information regarding these amendments to test the veracity of HMRC’s claim that there was no change in policy.

HMRC’s duty of candour is invoked, the Appellant submitting that HMRC, as a public authority, must provide all evidence to assist the Tribunal generally and specifically where there is a legitimate expectation challenge. It is said that documents evidencing the reasons for the change in guidance are probative of the nature of representations made to taxpayers. The Appellant denies that the request is a “fishing expedition” as HMRC has acknowledged the amendment made to the guidance, albeit disputing that such amendment represented a change in policy.

The Appellant seeks disclosure of documents leading up to and justifying the VAT assessments under appeal, including third party correspondence and internal decision-making records. The Appellant submits that these documents are necessary to determine when HMRC had actual knowledge of facts sufficient to justify making the assessments, which is a live issue in the appeal.

In the context of section 73(6)(b) of VATA and the recent decision in Nottingham Forest FC Limited v HMRC [2024] UKUT 145 (TCC), the Appellant contends that in order to make good its case on time limits the requested disclosure must be provided as, somewhat unusually, this is a case in which the Appellant does not have the relevant documents necessary to identify when the 12 month time limit began to run.

HMRC submits that the request is a “fishing expedition” aimed at establishing whether there has been a change of policy, which is not necessary or proportionate to the issues before the Tribunal. The substantive issue, whether the Appellant’s flapjacks are cake or confectionery, is said to be a question of fact, to be determined by a multifactorial assessment, and does not depend on whether HMRC changed its policy. The best judgment challenge is said to be narrowly premised on an assertion that the quantum of the assessment is incorrect or that HMRC did not consider material provided by the Appellant. Each is therefore a question of fact unconnected to HMRC’s policy on the correct VAT treatment of flapjacks.

As to the Appellant’s legitimate expectation ground HMRC contend that, to the extent that the Tribunal has jurisdiction, the case will only be established where the Appellant can show reliance on clear, unambiguous public guidance. That is a matter of evidence for the Appellant. In this regard internal policy documents regarding amendments made are irrelevant.

As the relevant disputed issue is whether the 05/20 – 10/22 Assessments, HMRC asserts that all relevant correspondence i.e. the 14 September 2023 letter and the covering email has already been disclosed to the Appellant because that is the evidence on which they rely to extend the time limit to the maximum 4-year period. As such, the wider scope of the disclosure request including notes of discussions, internal sign-off, notices of enquiry etc are neither necessary nor proportionate, as they are not probative of the timing issue.

The Appellant’s grounds of appeal rely heavily on the terms of HMRC’s public guidance as it existed prior to amendment in July 2023. They contend that no assessment can have been made in exercise of HMRC’s best judgment for a period in which, it is claimed, that the Product met the terms of the guidance. They also contend that the guidance establishes a legitimate expectation that HMRC would not assess for periods in which the terms of the guidance was met.

Whilst HMRC challenge the Tribunal’s jurisdiction to consider the legitimate expectation argument they have, rightly in my view, made no application under rule 8(3)(c) of the Rules to strike out any of the grounds referencing legitimate expectation of public law matters. The 26 paragraphs of the statement of case dedicated to the issue demonstrate that legitimate expectation is a matter which is live in the appeal. It is also my view that the jurisdictional challenge is not a matter which would meet the criteria set out in Wrottesley v HMRC [2015] UKUT 637 (TCC) to be considered as a preliminary issue. It will be for the Tribunal hearing the appeal to determine the question of jurisdiction. Then, if jurisdiction is established, whether any legitimate expectation which can be evidenced on the facts, is capable of vitiating the assessment on either or both of the grounds that HMRC impermissibly exercised their section 73(6) VATA discretion to make an assessment and/or that the assessment was not made in exercise of HMRC’s best judgment.

The statement of case and objection to the Application asserts that in in order to have an evidenced case on legitimate expectation (should there be jurisdiction at all) the Appellant must establish that it relied on guidance which was clear, unambiguous and devoid of relevant qualification and that internal documents concerning the amendment cannot be relevant to that issue. The proposition is not expressly supported by authority and is baldly made. With respect to HMRC’s position, the developing case law on secret policies/secret amendments to public policies is significantly more complicated than is apparent from HMRC’s bald assertion (see line of cases from R (Lumba) v Secretary of State for the Home Department [2011] UKSC 12). Its application in tax is unclear.

In my consideration of the Application, I need to ensure that the Tribunal panel before which this case is listed, has all of the relevant documentation needed to determine all of the pleaded issues justly and fairly (as confirmed in paragraph 25 McCabe v HMRC [2020] UKUT 266 (TCC)). I am conscious, and agree with the Tribunal in RBS, that in order for me to grant a direction requiring specific disclosure the material sought cannot be “merely relevant” it must be necessary. However, it is not for me to predetermine any of the issues in this appeal. I must therefore consider each pleaded argument or issue in its own right and consider whether the documentation of which disclosure is sought would be necessary to determine the issue. Where a particular issue is conditional on another, I consider it is in accordance with the overriding objective to assume that the precondition may be met and determine what documentation would then need to be considered. If the Tribunal hearing this appeal were to decide that it had jurisdiction to consider public law arguments it would then need to consider the relevance of HMRC’s extant policy in the period 1 April 2020 – July 2023 when determining whether HMRC have exercised their judgement to assess and/or acted in best judgment. A full and complete understanding of HMRC’s policy on flapjacks would not only be relevant but also necessary. Precisely when over the period 1 April 2020 to July 2023 HMRC considered that flapjacks containing protein powder or vitamins were to be treated differently to those containing dried fruit, chocolate chips will be necessary to fairly determine the outcome of either of those pleaded arguments. As a consequence, I consider that documentation demonstrating the cognitive and procedural basis on which an amendment was made to the relevant public guidance necessary in the determination of the appeal.

In so doing I do not consider that the Appellant is achieving disclosure which it should properly have applied for within the judicial review proceedings. The public law arguments advanced and countered are live in this appeal. On that basis I am also of the view that HMRC’s public law duty of candour applies (to the extent that such duty is wider than the duty which should generally apply in all proceedings in which a public authority is a party including this Tribunal).

The Application is not a fishing expedition. There is no dispute that the guidance was changed. There is a dispute whether that was a change of policy and how the change to the guidance might be relevant for periods prior to the change. However, it cannot be said that the Appellant is seeking documents the existence of which is uncertain. The guidance was not, as the Appellant observes, made by accident. Something prompted it and someone drafted it. The documents concerning these matters are what are sought.

I also note in passing that one of HMRC’s objections, as set out in their Notice of Objection, misrepresents the Appellant’s best judgment argument as being limited to arguments on quantum and review of documentation provided by the Appellant. The grounds of appeal state that best judgment was not exercised because “HMRC failed to review all the material which showed a change of policy”. The Appellant does not state that it provided such material. Within the context of the other paragraphs concerning best judgment the Appellant’s pleaded position is that the decisions to assess, taken in 2024, failed to take account of all relevant materials which, the Appellant contends, show there was a change of policy and not simply a clarificatory amendment to the guidance. Disclosure of the timeline of the drafting change and what promoted that change are therefore matters with which the Tribunal will need to be concerned (assuming jurisdiction is accepted).

HMRC have not challenged that the scope of the request as disproportionate/unclear or that the documents cannot be found.

Accordingly, I have decided that HMRC should be directed to disclose the documents requested in Category 1.

By its grounds of appeal the Appellant contends that the 06/20 – 10/22 Assessments have been issued more than 1 year after evidence of fact sufficient in the opinion if HMRC to justify the making of those Assessments. By their statement of case, and as now confirmed in the notice of objection and accompanying documentation, HMRC contend that the final relevant piece of evidence on which they justify the 06/20 – 10/22 Assessments was a letter dated 14 September 2023 from Grant Thornton to the Appellant on behalf of a third party retailer. The letter states that it was the retailer’s understanding that the Appellant was (at that time) “proposing to apply VAT at the standard rate … when selling Product]”. Grant Thronton advanced the argument that the Product was properly zero rated. As is apparent from an email dated 3 November 2023 that letter was provided to HMRC by the retailer on that date.

By its Application for the Category 2 documents the Appellant seeks to establish whether there were any other similar letters received by HMRC about the Product which would have represented evidence of fact sufficient to raise the 06/20 – 10/22 Assessments earlier.

As pleaded in the statement of case DCM (Optical Holdings) Ltd v Revenue and Customs (Scotland) [2022] UKSC 26) (DCM) recognises that constrictive knowledge of evidence is insufficient to set the one-year time limit in section 73(6) VATA running. The test to be applied (as confirmed in DCM) is:

“(i)

to decide what were the facts which, in the opinion of the officer making the assessment on behalf of the Commissioners, justified the making of the assessment, and (ii) to determine when the last piece of evidence of these facts of sufficient weight to justify making the assessment was communicated to the Commissioners. The period of one year runs from the date in (ii).”

DCM goes on to confirm that HMRC’s failure to make an earlier assessment on the basis the evidence then available is subject to challenge only on the basis that no reasonable officer could have concluded that there was insufficient evidence.

By the Category 2 application the Appellant essentially contends that it cannot question whether HMRC acted unreasonably in making the 06/20 – 10/22 Assessments because it does not know what information was provided to HMRC by other third parties about the Product.

Ordinarily, one might expect correspondence provided by one party, even if it concerns another, to represent the provision of evidence of fact of which HMRC could only reasonably be said to have constructive knowledge. Despite that, in this case, HMRC rely on the 14 September 2023 letter which they say gave them actual knowledge that the Appellant was zero rating the Product and from which they were able to determine that the Product was properly standard rated. The letter provides a detailed analysis of the Product including its appearance, marketing, ingredients, taste and texture, and the eyes of the customer. HMRC have therefore taken constructive knowledge and treated it as actual knowledge. The Application seeks to know whether any other evidence of this type might be available.

Having considered the matter deeply I have decided not to direct the Category 2 disclosure. The Appellant now knows what evidence HMRC say they rely on as the last piece of evidence of fact justifying the relevant period Assessments. The Tribunal hearing the appeal will need to determine if, on the evidence, HMRC did take that evidence into account when making the 06/20 – 10/22 Assessments. If that evidence was not taken into account HMRC point to no other evidence to justify the start of the one year time limit and the appeals against the 06/20 – 10/22 Assessments will succeed. If HMRC satisfy the Tribunal hearing regarding the use of the evidence, it will be open to the Appellant to demonstrate that HMRC had been provided, by it, with similar evidence probative of the facts as set out in that letter at an earlier time such that it was unreasonable not to assess earlier. The Appellant knows whether it provided HMRC with such information and if so when.

I consider the possibility that another third party provided similar information to that contained in the letter of 14 September 2023 materially earlier than November 2023 to be remote. The Appellant has no knowledge that other third parties were in correspondence with HMRC about the Product. Further, it appears that the letter of 14 September 2023 to the Appellant was prompted by the proposal by the Appellant itself to standard rate the Product at or about that time. Thus, there is nothing to indicate that HMRC may have been approached by other third parties significantly earlier than mid to late 2023. As such, I consider that the disclosure request does not facilitate the just determination of the appeal, rather it amounts to an impermissible fishing expedition seeking to obtain documents the possible existence of which is remote.

Further the full scope of the request is not proportionate. Even were HMRC to have had engagement with other retailers about the Product unless and until that engagement was escalated to those within HMRC responsible for the Appellant it would not be actual knowledge of the Appellant’s tax affairs. It cannot be reasonable for HMRC to be required to look to their relationship with unnamed third parties.

It is reasonable to expect that HMRC will tender the assessing officer as a witness in these proceedings. If, after the exchange of witness statements, the Appellant considers that there is a basis to renew its request for specific disclosure in a more focused way it may make such application as it thinks fit.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.