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Upper Tribunal rules that legitimate expectation can be argued by taxpayers

Updated: Sep 15, 2021

Important VAT Case. Upper Tribunal rules that legitimate expectation can be argued by taxpayers

In a recent landmark case (KSM Henryk Zeman) the Upper Tribunal (UT) ruled that the taxpayer was allowed to raise a legitimate expectation argument.

As it turned out the taxpayer’s appeal was dismissed but the UT’s decision regarding whether a legitimate expectation argument can be made in the Tribunal is certainly a game changer.

Previously there had been several decisions of both the First Tier Tribunal (FTT) and the UT which found that they did not have jurisdiction to rule on legitimate expectation and stated that this could only be argued in the High Court in judicial review proceedings. For most taxpayers, judicial review is not a viable option given the substantial costs involved. Further, unlike in the FTT, taxpayers have the additional hurdle of having to seek permission to bring their judicial review claim which is by no means guaranteed.

What is a ‘legitimate expectation’ and why does it matter?

Where HMRC has given guidance to a taxpayer on how to treat a particular transaction for VAT purposes then, in certain circumstances, this can form a legitimate expectation that the taxpayer can rely on to support that VAT treatment.

For example:

HMRC might state in their guidance to a taxpayer that the supply of ‘X’ is exempt from VAT. The taxpayer follows the guidance and does not account for VAT on its supply of ‘X’. It later turns out that HMRC’s guidance was incorrect in law and HMRC decide to raise an assessment against the taxpayer on the basis that the supply is subject to VAT. In such circumstances, the taxpayer may be able to argue that they have a legitimate expectation based on the guidance that was given at the time to defend against the assessment. If successful, this would mean that the taxpayer would not have to pay the VAT despite it being due in law.

HMRC’s guidance can and often does change because of new case law. It is only right that if a taxpayer has in the past relied on HMRC’s guidance in good faith that they will not be punished for having done so if it later turns out to be incorrect.

We can help

At VATangles we regularly represent/support taxpayers in their VAT appeals against HMRC.

Contact us if you have received an assessment from HMRC and would like advice or are looking to appeal a decision.

Tel: 01858 565142


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