R (on the application of Metropolitan International Schools Ltd) v R & C Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 30 December 2019 |
| Neutral Citation | [2019] UKUT 407 (TCC) |
| Date | 30 December 2019 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2019] UKUT 407 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Judge Jonathan Richards
James Ramsden QC and Conrad McDonnell, instructed by Reynolds Porter Chamberlain LLP, appeared for the claimant
Eleni Mitrophanous, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the defendants
Value added tax – Application for judicial review – Agreed method to determine proportion of supplies standard rated – Method withdrawn by HMRC – Legitimate expectation of taxpayer – Proportionate response – Permission to bring judicial review refused.
The Upper-tier Tribunal (UT) refused a request for permission to bring judicial review proceedings in respect of decisions made by HMRC in relation to an agreed method for apportioning supplies between zero and standard rated elements. In particular, their withdrawal of the method in the light of the decision in College of Estate Management v C & E Commrs [2005] BVC 704. Although it was not deemed to be a hopeless case, there was no realistic prospect of success.
The School supplied home study distance learning materials including training manuals that would, in isolation, qualify for zero-rating. In 1999 they reached a compromise agreement with HMRC on a method for determining an apportionment of course fees between standard and zero-rated supplies. This was confirmed by a letter dated 14 January 2000.
In 2005 the House of Lords determined in its decision in College of Estate Management v C & E Commrs [2005] BVC 704 that the College was making wholly standard rated supplies. This potentially affected the position of the School. Subsequent meetings between the School and HMRC in July 2006, and November 2007, however, did not result in any disturbance of the apportionment method previously agreed and the School concluded HMRC were content their supplies were different from those of the College and the previous arrangement could continue.
In August 2009 HMRC issued a second letter to the School informing them, in light of the House of Lords decision, they considered the School's supplies to be wholly standard rated. This was later confirmed by the UT [2017] BVC 535. The agreed method was withdrawn, initially with retrospective effect, but this was later amended to only those VAT periods after 12/09.
The School contended they had a legitimate expectation, based on the terms of the letter of 2000, that HMRC would not withdraw the agreement reached (even after the second letter of August 2009) in relation to run- off contracts or without reasonable notice or a reasonable transition period.
It was agreed the principles underpinning the law of legitimate expectation are “fairness” and “good administration” but these must be seen in the light of HMRC's duty to collect tax. If the Schools claim for judicial review were to succeed they would have had to establish HMRC had made a clear and ambiguous statement that they would forego tax arguably payable. They may have done so, in relation to the apportionment method, unless and until it withdrew from the arrangement set out in the letter of 2000. A retrospective assessment was issued and subsequently remitted to recognise this. But the letter allowed HMRC to terminate “at any time”. There was no representation HMRC would give any notice of termination. There was therefore no such statement in relation to periods after termination of the agreement. HMRC were not “resiling” from the agreement. They were operating in accordance with it.
The School argued a provision to terminate at any time would be unfair since it had made important long-term business decisions based on the terms of the agreement. The UT, in rejecting this, stated that unfairness was no different for any business that was found to have a greater VAT liability than previously thought.
The UT concluded, HMRC's express power to terminate the arrangement in the letter of 2000 “at any time” was fatal to the School's claim for judicial review. Permission to bring judicial review proceedings was refused.
This case has taken many twists and turns to arrive at this point which confirms there can be some legitimate expectations in relation to agreements with HMRC but they must be balanced with HMRC's duties and they are therefore limited, particularly if the VAT position changes as a result of caselaw rather than a change in legislation by Parliament.
[1] The claimant (who I will refer to as the “School”) applies for permission to bring judicial review proceedings in respect of decisions that the defendants (“HMRC”) made in connection with its VAT liabilities.
[2] Much of the relevant background is uncontroversial. However, the School and HMRC have different perspectives on some points of detail, such as what happened during and following meetings between them in 2006 and 2007. The School is entitled to have its application for permission to bring judicial review determined on the basis of the facts as it alleges them to be. Therefore, in this section, I will set out a summary of the relevant factual background as the School has presented it without determining whether that sets out the correct, or full, picture.
[3] At times material to this application, the School supplied home study distance learning materials which included the supply of training manuals. The VAT analysis of the School's business was not straightforward since (i) the supply of the training manuals would (viewed in isolation) be zero-rated for VAT purposes, but (ii) to the extent the School was supplying education or training services those would be standard-rated1.
[4] Over the years the School and HMRC2 had many meetings to consider the nature of the supplies that the School was making and, on 21 December 1999, they reached a compromise. The agreed compromise was reflected in a letter (the “2000 Letter”) from HMRC to the School dated 14 January 2000 which started with the following paragraphs:
I am writing to confirm the method agreed at our meeting of 21 December 1999 to be used to apportion the course fees between standard and zero rated supplies.
The method is to be used from 1 October 1998, and is based on the costs involved in making both the standard and zero rated supplies. Should there be any changes in your business which prevents this method giving a fair apportionment of the course fees you must notify us immediately. This method may be reviewed, amended or withdrawn by Customs and Excise at any time. You may apply to this office for a change of method if this one no longer produces a fair and reasonable result.
[5] It is not necessary to set out in detail how the standard-rated proportion was to be calculated. It suffices to note that, for so long as the agreed method was in operation, it resulted in a material amount of the Company's turnover being treated as consideration for zero-rated supplies.
[6] HMRC did not terminate the arrangement until 26 August 2009. While the arrangement was in place, the School asserts and, for the purposes of this application, I will accept, that it relied on the presence and terms of the arrangement in connection with its business affairs. For example, it determined the price that it would charge its students by assuming that the output VAT due to HMRC was to be determined in accordance with the arrangement. Decisions on staff salaries, working capital and other budgetary matters were made on a similar assumption.
[7] Up until 2005, there were no material problems. HMRC inspected the School's VAT position in 2002 and during their visits at this time reaffirmed the approach set out in the 2000 Letter. There were other routine visits during which HMRC also confirmed the continuing application of the principles set out in the 2000 Letter.
[8] In 2005, the House of Lords released its decision in College of Estate Management v C & E Commrs [2005] BVC 704. That decision concerned an educational establishment (that was not VAT-exempt) which provided residential, taught courses and books to its students. The House of Lords determined that the educational establishment was making wholly standard-rated supplies. Both HMRC and the School considered the implications of that decision.
[9] On the 17th and 18th of July 2006, there was a meeting between the School and HMRC whose purpose was specifically to discuss the College of Estate Management case. At the end of that meeting, the School asserts and, for the purposes of this application I will accept, that HMRC's Officer Edwards indicated that he considered the supplies the School was making to be different from those made in College of Estate Management. He took some...
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The Queen (on application of Metropolitan International Schools Ltd) v The Commissioners for HM Revenue and Customs
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