Metropolitan International Schools Ltd v The Commissioners for HM Revenue and Customs

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLord Justice Newey,Lord Justice David Richards,Lord Justice McCombe
Judgment Date14 February 2019
Neutral Citation[2019] EWCA Civ 156
Date14 February 2019
Docket NumberCase No: A3/2018/0068

[2019] EWCA Civ 156

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE UPPER TRIBUNAL

(TAX AND CHANCERY CHAMBER)

Mr Justice Mann and Judge Ashley Greenbank

[2017] UKUT 431 (TCC)

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

Lord Justice McCombe

Lord Justice David Richards

and

Lord Justice Newey

Case No: A3/2018/0068

Between:
Metropolitan International Schools Limited
Appellant
and
The Commissioners for Her Majesty's Revenue and Customs
Respondents

Mr James Ramsden QC and Mr Conrad McDonnell (instructed by Reynolds Porter Chamberlain LLP) for the Appellant

Miss Eleni Mitrophanous (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondents

Hearing date: 23 January 2019

Approved Judgment

Lord Justice Newey
1

This appeal relates to the interpretation of section 84(10) of the Value Added Tax Act 1994 (“the VATA”). What is at issue is whether section 84(10) enables the appellant, Metropolitan International Schools Limited (“the School”), to advance a legitimate expectation claim in the context of appeals to the First-tier Tribunal (“the FTT”) rather than by way of judicial review.

Narrative

2

The School provides distance learning courses. In a letter to the School dated 14 January 2000, HM Revenue and Customs (“HMRC”, then HM Customs and Excise) agreed that course fees should be apportioned for value added tax (“VAT”) purposes on the basis that the School was making both standard-rated supplies (of educational services) and zero-rated supplies (of books). The letter also stated, however, that the method “may be reviewed, amended or withdrawn by Customs and Excise at any time”, and on 26 August 2009, in the light of the decision of the House of Lords in College of Estate Management Ltd v Customs and Excise Commissioners [2005] UKHL 62, [2005] STC 1597, Officer Rashid of HMRC informed the School in a letter that she had discovered that the VAT treatment of its supplies of distance learning courses was incorrect and that the supplies were in fact taxable at the standard rate. The School objected, and on 23 October 2009 Grant Thornton wrote on its behalf arguing that the “principal supply in all of [the School's] contact with the student is the zero rated teaching material in the form of study manuals and books”, but also asking that, if HMRC's decision on the point were maintained, “the effective date from which the Company should account for VAT on its supplies should be six months from the date that decision is irrevocably confirmed”. “In our view,” Grant Thornton said, the School “has a legitimate expectation based on the conduct of HMRC, that the 2000 agreement was not affected by the College of Estate Management”.

3

On 4 December 2009, Officer Rashid responded that the School had to account for VAT at the standard rate, and that was echoed three days later in a letter to Grant Thornton in which the decision that the School's supplies were standard-rated was upheld on review, with the author (Officer Piper) adding:

“I note your comments concerning legitimate expectation and the effective date of the liability ruling; this is a matter for the local officer.”

On 30 December, Officer Rashid said that she had made it clear that she would be applying her ruling retrospectively and that she was in the process of raising assessments on that basis.

4

On 8 January 2010, Grant Thornton both told HMRC that an appeal had been lodged with the FTT and raised once more the question of whether the School should be allowed a transitional period. On 22 January, Officer Harris of HMRC accepted that the School “have a legitimate expectation that they could rely on the ‘agreed method of apportionment’ of 14 January 2000 until the method was reviewed, amended or withdrawn” and said that he would “recommend that we take no retrospective action prior to 27 August 2009 over the VAT liabilities in question”. Grant Thornton returned to the need for a transitional period in a letter dated 4 February, but on 19 February Officer Winder of HMRC said that Officer Harris had been right not to offer such a period, and on 22 March Officer Winder went further, explaining that HMRC had “decided that it does not have power to refrain from collecting the tax which it believes is legally due in this case” and that remission was, after all, deemed inappropriate, while acknowledging that HMRC had “dealt with this case badly” and apologising for “the uncertainty and any confusion caused since Mr Harris advised you that he was recommending that concessionary treatment be applied”. That position was itself, however, revisited, as a result of which on 27 May HMRC said that they could now “confirm … the original position that [the School] could indeed rely [on] the terms of the 2000 agreement until withdrawn on 27 August 2009”, and on 18 June HMRC told the School that they accepted that “although the tax assessed was properly due, no further action will be taken on the tax due between 1 April 2006 and 31 August 2009 and a credit will be put ‘on file’ for this period”. On the other hand, the School was “reminded that … [it] must with effect from 1 September 2009 account for VAT in accordance with [HMRC's] ruling dated 26 August 2009”.

5

On 18 June 2010, the School issued judicial review proceedings in respect of “HMRC letter dated 22 nd March 2010”. The relief sought included an order prohibiting HMRC from “raising further assessments … for the two prescribed accounting periods next beginning after 26 th August 2009”. On 25 January 2013, the judicial review proceedings were transferred to the Upper Tribunal (Tax and Chancery Chamber) (“the UT”) and stayed subject to any further order of the UT.

6

The School's appeals came before the FTT (Judge Howard Nowlan and Mr Julian Stafford) in 2015. In a decision dated 2 October 2015, the FTT concluded that the School's services were “entirely zero-rated supplies of books” (see paragraph 175 of the FTT decision). It also, however, commented on an argument advanced by the School to the effect that HMRC should in any event have allowed it to continue to use the approach agreed in 2000 for a run-off period, in relation to contracts that it had entered into before 27 August 2009. The FTT expressed the view that “the pre-August 2009 contracts should have been protected from any change in basis” (paragraph 175), but also said that it would not rule on whether the School should be allowed to amend its pleadings to run the point (since “it was only after an interval of some years” that the School had advanced that claim – see paragraph 165) and concluded that it had no jurisdiction to adjudicate on the question (paragraph 175). The School had invoked section 84(10) of the VATA, but the FTT considered that “s 84(10) is not engaged because the relevant earlier decisions simply related to the periods prior to August 2009 and had nothing to do with the assessments in relation to the later supplies under the pre-August 2009 contracts” (paragraph 162).

7

HMRC appealed to the UT, and the School cross-appealed. Reversing the FTT, the UT (Mann J and Judge Ashley Greenbank) held that the School's supplies “do not fall within the zero-rating given to the supply of books” (paragraph 110 of the UT decision) but were standard-rated. Going on to consider the School's contention that it “had a legitimate expectation of a phased withdrawal of a previously agreed regime which would have allowed it to apply the old regime to the workout” of pre-August 2009 contracts, the UT considered that “the sensible and fair thing to do is to allow the point to be taken despite the formal absence of a pleading” (see paragraphs 113 and 137). Like, however, the FTT, the UT considered that section 84(10) of the VATA did not apply. In contrast, the UT parted company from the FTT on the substance of the legitimate expectation claim, saying this (in paragraph 153):

“It is therefore unnecessary for us to consider legitimate expectation and its applicability by the FTT or this tribunal on an appeal. We confine ourselves to observing that on the facts, that while HMRC plainly reserved a right to re-visit the question of the correct treatment of supplies, there was equally plainly a legitimate expectation that that would not be applied retrospectively. Nothing in the reservation in the relevant letter suggested that that might happen, and common sense and plain business dealings would have led to the expectation that it would not. The School was obviously entitled to rely on that. However, we do not consider that that legitimate expectation went so far as to allow the School to have a three-year run-off period for long-term contracts. The School was not entitled to assume that it was entitled to conduct its business affairs in such a way as to impose such a period on HMRC, and there was no evidence which would support the suggestion that HMRC indicated that such things were acceptable in the possible context of their revisiting the tax treatment of outputs.”

The legislative framework

8

VAT was introduced by the Finance Act 1972 with the United Kingdom's accession to the European Economic Community. Section 40(1) of the 1972 Act provided for an appeal to lie to a VAT Tribunal against a decision with respect to any of the matters listed in section 40(1)(a) to (i).

9

The scope of section 40 of the 1972 Act fell to be considered in Customs and Excise Commissioners v J H Corbitt (Numismatics) Ltd [1980] STC 231. The taxpayer company, which dealt in antique coins and medals, accounted for VAT pursuant to a “margin scheme” which, by virtue of article 3(5) of the Value Added Tax (Works of Art, Antiques and Scientific Collections) Order 1972, applied only if such records and accounts were kept as “the Commissioners may specify in a notice published by them for the purposes of this order or may recognise as sufficient for those...

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