The King on the application of Airline Placement Ltd v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Mr Justice Constable |
| Judgment Date | 19 May 2023 |
| Neutral Citation | [2023] EWHC 1191 (Admin) |
| Docket Number | Case No: CO/699/2022 |
| Court | Queen's Bench Division (Administrative Court) |
[2023] EWHC 1191 (Admin)
Mr Justice Constable
Case No: CO/699/2022
IN THE HIGH COURT OF JUSTICE
KING'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Nicola Shaw KC (instructed by Macfarlanes LLP) for the Claimants
Howard Watkinson and Ishaani Shrivastava (instructed by HMRC) for the Defendants
Hearing dates: 10–11 May 2023
Approved Judgment
This judgment was handed down remotely at 10.30am on Friday 19 th May 2023 by circulation to the parties or their representatives by e-mail and by release to the National Archives (see eg https://www.bailii.org/ew/cases/EWCA/Civ/2022/1169.html).
Introduction
This is an application by the Claimant (‘APL’) for judicial review to quash (1) the decision of the Defendants (‘HMRC’) dated 26 November 2021 (‘the Decision’) confirming their view previously expressed in a letter dated 26 January 2021 (‘the Liability Letter’) relating to the tax treatment of security bonds and that APL had no legitimate expectation in relation to a Non-Statutory Clearance (‘NSC’) by HMRC dated 17 July 2009 (‘the Clearance Letter’), and (2) the consequential assessment to Value Added Tax (‘VAT’) that HMRC issued for VAT periods 03/17–12/20 (‘the Assessment Period’), in the sum of £10,717,426.00 (‘the Assessment’).
The basis of the application is that the Decision and consequent Assessment are said to be in breach of APL's legitimate expectation that the VAT treatment set out in the Clearance Letter would apply for the duration of the Assessment Period and would not be withdrawn without fair notice and with retrospective effect. In response, HMRC contend that the request for NSC by APL (‘the NSC Request’) was materially inaccurate and misleading, and there was not full and frank disclosure such that no legitimate expectation arises. HMRC accepts that if the NSC Request was not materially inaccurate and misleading and there was full and frank disclosure, then a legitimate expectation will have arisen and that they would not be entitled to levy VAT retrospectively and would be required to allow a reasonable time for APL to re-organise its affairs.
APL advance an alternative position that even if no legitimate expectation arose, it was nevertheless unreasonable and/or an abuse of power to withdraw the Clearance Letter without fair notice and with retrospective effect in light of what it says was its longstanding treatment that HMRC has either agreed or implicitly accepted.
APL rely upon the witness evidence of Messrs Crawford, Steele, Whitehouse and Orpwood and HMRC relies upon the evidence of Mr McBride.
Factual Background
APL is a member of the CTC Aviation Group Plc (‘CTC Group’) which, in May 2015, was acquired by the L3Harris Technologies, Inc. corporate group (‘L3’), a provider of global aerospace and defence technology services. The VAT treatment issue relates to a training programme for cadet pilots which became called the ‘Wings Programme’ (‘the Programme’). The Programme was initially established in 2003 as a joint venture between CTC Aviation Training (UK) Limited (‘CTC’), also a member of the CTC Group, and McAlpine Aviation Training (‘McAlpine’).
Prior to the introduction of the Programme, by a letter dated 6 August 2002, McAlpine sought NSC from HMRC's predecessor body, the Commissioners of Customs & Excise, in relation to the VAT treatment of fees for flying training. The letter stated that a new company had been formed with the intention of offering airlines an alternative to the traditional method of sponsoring future pilots through their training and subsequently employing them as pilots. It stated that the most significant difference between the proposed scheme and what was described as the traditional sponsorship model was that finance was being offered from a bank, rather than the airlines being expected to directly fund the programme. Appended to the letter were two appendices setting out diagrams of the arrangements. The final bullet point of the description of the proposed scheme stated that:
‘ It is usual for airlines to tie in newly qualified pilots for a minimum period, so that the airlines can recoup the costs that they have incurred in training the pilots. Consequently, the new product also aims to place the entire financial risk of pilots prematurely leaving their contracts of employment with the employee. This should be achieved by the proposed loan arrangements as illustrated in the appendices.’
Although the models were slightly different, the second (which Mr Toby Steele, former Finance Director of CTC Aviation Group plc at the relevant time, gives evidence at paragraph 3.2 of his statement was the only one put into effect) involved:
(1) The receipt by the JV of supplies of subcontracted aviation training and aviation training from the parties to the JV;
(2) The provision of ‘training product’ by the proposed JV to the ‘Recruitment Company’;
(3) The grant of a loan to the trainee by a bank. The loan is made to the trainee and is a professional development loan with repayments not commencing until six months following completion of training;
(4) The trainee granting a loan to the Recruitment Company;
(5) A fee for providing the pool pilot (to the Recruitment Company) for completion of final stage training;
(6) The Recruitment Company repaying the loan from the trainee in full;
(7) The granting of the loan by the trainee to the airline, which becomes repayable over a period of time following the trainee's training. At the same time the trainee enters into a separate agreement that entitles the airline to compensation should the trainee fail to complete a minimum term of employment, and that this compensation should be equal to and set off against the outstanding loan repayments;
(8) Repayment of the loan to the bank over a period of minimum employment. ‘ This may be by way of ‘salary sacrifice”; and
(9) Repayment of the loan to the bank over a period of time.
On 15 August 2002, in response, the Commissioners of Customs & Excise indicated:
‘ Based on my understanding of the situation the joint venture will be receiving supplies from the two parties and providing onward supply of training to the airline industry within the United Kingdom’
Between August 2002 and March 2009, HMRC conducted at least four audit visits of UK members of the CTC Group and no issues with the VAT treatment of arrangements were raised. By 2006, the internal memo of Pete Burrell of HMRC shows that, in terms of describing the scheme, the language of ‘bond’ was utilised. The note states amongst other things that HMRC's understanding was that ‘ No charge is made to the pilot for any of the training’ and:
‘ the bond is returned to the pilot upon completion of training. It is then passed on to the airline as ‘security’ for continued employment, and the airline repays is to the pilot over an agreed period of time’.
Following CTC Group's acquisition of McAlpine's interest in the joint venture, a review of the Programme was carried out by Deloitte in November 2007. Deloitte were asked to comment on the VAT treatment of the Programme, and provide recommendations for any appropriate next steps. In its consideration of ‘Background’, the Deloitte report specifically noted:
‘ During their employment with the partner airline, the cadet may receive a reduced salary to take account of the fact that the partner airline has paid a placement fee to APL for the provision of the cadet. However, these arrangements are made between the sponsor airline and the cadet without APL being party to the agreement.’
The Deloitte report identified that an area of likely challenge from HMRC included the following:
‘ The deposit of a bond by the cadet with APL is consideration for a supply of training made by APL[….]they may argue that the only supply is one made of training and that this is made to the cadet. This would have a two fold impact. Firstly, APL would have to account for VAT much earlier than it currently does, and secondly the pricing of the Wings programme will be affected from the perspective of the cadet as a result of the irrecoverable VAT it will suffer.’
As explained by Mr Crawford, the VAT treatment under the security bond arrangement was essential to CTC because it impacted directly on pricing. CTC's competitors operated their training programmes in jurisdictions where VAT (or equivalent taxes) did not apply to training fees and so they could charge lower prices. For example, the closest like for like competitor that had an easyJet programme was FTE Jerez who operated out of Spain and, thus, did not apply VAT to training services.
In recommending that APL seek a Ruling from HMRC, Deloitte advised:
‘ For a ruling to be binding, HMRC must be in possession of the complete facts and context of the issues of uncertainty. Therefore the following information needs to be provided:
A clear explanation of the points that require HMRC's guidance;
The reason for uncertainty;
A brief indication of alternative tax treatments that have been considered;
[…]
Copies of any other documents APL considers to be relevant [sic] to the issue in question
[…]
Details of any related transactions or contracts.’
Prior to provision to HMRC of its request for clearance, pursuant to the advice from Deloitte, a draft of the proposed request was circulated for comment by Deloitte to APL in February 2009. The track-changed draft contained the following sentences:
‘During their employment with the sponsor airline, the cadet may receive a reduced salary to take account of the fact that the sponsor airline has paid a placement fee to APL for the provision of the cadet. However, these...
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