Judicial review is a hot topic amongst taxpayers and their advisers at present. The decision of the Upper Tribunal (UT), R (on the application of Telefonica Europe plc) v HMRC [2016] UKUT 173 (reported in Tax Journal, 22 April 2016) sheds some light on this difficult area.
Telefonica challenged HMRC’s change of approach on the basis that it constituted a breach of Telefonica’s substantive legitimate expectation, based on a clear assurance given by HMRC in 2008 that it could continue using the ‘revenue methodology’ until there was a material change in the law or in Telefonica’s business, which there has not been. A second complaint was that HMRC had imposed the new ‘usage methodology’ without adequate consultation.
The Upper Tribunal did not agree, ruling that not only must the taxpayer give full details of the specific transaction, but critically any HMRC ruling or statement relied on should be ‘clear, unambiguous and devoid of relevant qualification.’ Firstly, the UT pointed out that Telefonica had not asked HMRC for a ruling on future treatment of the VAT adjustment for the line rental. It simply claimed the refund of past VAT paid, setting out the reasons why such a refund was justified and explaining the revenue methodology. There was nothing that would have alerted HMRC to the suggestion that Telefonica was seeking an assurance that it would be entitled to apply the revenue methodology for years into the future.
Secondly the UT was clear that HMRC did consult properly in that they provided Telefonica with an adequate opportunity to make representations and explain why they could not implement the usage methodology.
Telefonica is another reminder of the reluctance of the courts to tie HMRC down to assurances unless made in the clearest and most unambiguous circumstances. The best advice to taxpayers seeking a ruling that will ‘stick’ is to be absolutely clear on what the transaction entails, provide a full analysis of the tax effect of the proposed arrangements and then ask for a formal ruling confirming the tax treatment from HMRC. Litigation after the event may not succeed unless these elements are in place.
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Telefonica Europe and legitimate expectation
Judicial review is a hot topic amongst taxpayers and their advisers at present. The decision of the Upper Tribunal (UT), R (on the application of Telefonica Europe plc) v HMRC [2016] UKUT 173 (reported in Tax Journal, 22 April 2016) sheds some light on this difficult area.
Telefonica challenged HMRC’s change of approach on the basis that it constituted a breach of Telefonica’s substantive legitimate expectation, based on a clear assurance given by HMRC in 2008 that it could continue using the ‘revenue methodology’ until there was a material change in the law or in Telefonica’s business, which there has not been. A second complaint was that HMRC had imposed the new ‘usage methodology’ without adequate consultation.
The Upper Tribunal did not agree, ruling that not only must the taxpayer give full details of the specific transaction, but critically any HMRC ruling or statement relied on should be ‘clear, unambiguous and devoid of relevant qualification.’ Firstly, the UT pointed out that Telefonica had not asked HMRC for a ruling on future treatment of the VAT adjustment for the line rental. It simply claimed the refund of past VAT paid, setting out the reasons why such a refund was justified and explaining the revenue methodology. There was nothing that would have alerted HMRC to the suggestion that Telefonica was seeking an assurance that it would be entitled to apply the revenue methodology for years into the future.
Secondly the UT was clear that HMRC did consult properly in that they provided Telefonica with an adequate opportunity to make representations and explain why they could not implement the usage methodology.
Telefonica is another reminder of the reluctance of the courts to tie HMRC down to assurances unless made in the clearest and most unambiguous circumstances. The best advice to taxpayers seeking a ruling that will ‘stick’ is to be absolutely clear on what the transaction entails, provide a full analysis of the tax effect of the proposed arrangements and then ask for a formal ruling confirming the tax treatment from HMRC. Litigation after the event may not succeed unless these elements are in place.
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