Vacation Rentals: reliance on HMRC’s business briefs
‘A quotation is a handy thing to have about, saving one the trouble of thinking for oneself, always a laborious business.’ (A.A. Milne)
In R (on application of Vacation Rentals (UK) (formerly known as Hoseasons Group Ltd)) v HMRC  UKUT 383 (TCC), the Upper Tribunal held that HMRC was required to treat the card processing activities of Vacation Rentals as exempt from VAT, in accordance with HMRC’s Business Brief 18/06.
HMRC’s guidance serves an important role in applying statute in the real world and expanding upon occasionally terse tax rules. In Vacation Rentals, the Upper Tribunal clarified some of the limits on HMRC’s ability to stand aside from its guidance. In particular, it looked at an important question: where is the line between a company that is following conditions HMRC has established and one that is just trying to save itself the laborious business of thinking for itself?
VAT treatment of processing fees
Vacation Rentals related to fees that were charged to holidaymakers when collecting payments made by credit or debit cards.
The CJEU has now ruled that such card handling services are generally taxable (see National Exhibition Centre v HMRC  STC 2132); but, at the time, the VAT treatment followed the Court of Appeal in Bookit v HMRC  STC 1367 and the Inner House of the Court of Session in SEC v HMRC  STC 967. Those cases held that such services may be exempt for VAT purposes as:
‘transactions including negotiation, concerning deposit on current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection’ (now article 135(1) of the Principal VAT Directive)
In Bookit, the card handling services comprised the following:
1. Bookit took a customer’s card details and security information and transmitted that information to the card issuer.
2. Bookit received the authorisation codes from the card issuer.
3. Bookit transmitted the card information and authorisation codes to Girobank (as the ‘merchant acquirer’ bank facilitating the transaction).
4. Girobank debited the card issuer and credited Bookit.
The High Court in Bookit (overturning the First-tier Tribunal) considered that it was the step of obtaining the authorisation codes for transmission to the merchant acquirer that was crucial. In the words of Henderson J in HMRC v Axa UK Plc  EWHC 1137 (Ch), the provision of information from the company to the merchant acquirer ‘inevitably brought about’ a relevant transfer of funds (para 72).
The decision in SEC reached a similar conclusion, although the company in that case transmitted card information via an intermediary rather than directly with the card issuers.
Business Brief 18/06
HMRC’s Business Brief 18/06 was expressly written ‘following the end of litigation in the cases of Bookit and Scottish Exhibition Centre Ltd (SEC)’.
The business brief described the components in the supply in Bookit and included, as a fourth step, ‘transmitting the card information with the necessary security information and the card issuers’ authorisation codes to Girobank’. The business brief stated that ‘because the fourth component was part of Bookit’s service to the customer, and had the effect that funds were transferred to its account with Girobank, exemption was available to Bookit’. The business brief concluded that if a company makes a separate charge for handling debit or credit cards that ‘includes the fourth component listed above, then the additional charge will be exempt’. The business brief did not distinguish the facts of SEC from those of Bookit.
Facts of Vacation Rentals
In Vacation Rentals, the steps in processing card payments were described as follows:
1. The company took the customer’s card details and security information and sent them to the merchant acquirer (this time, Barclays).
2. Barclays sent the details to the card issuer.
3. The card issuer then provided the authorisation codes to Barclays, which sent them on to the company.
4. The company collated details (including authorisation codes) for all payments for that day into a single ‘settlement file’ that was sent to Barclays.
5. Once that was done, payment was triggered.
The company asserted that the steps above reflected the same card processing activities as in Bookit. Given the ‘clear, unambiguous and unqualified’ terms of the Business Brief, the company had a ‘legitimate expectation’ that HMRC would treat the supplies as exempt from VAT.
HMRC claimed that the business brief did not apply because the company’s facts were different. Although the company had transmitted the authorisation codes to Barclays (as the merchant acquirer), Barclays had already obtained them.
HMRC argued that the term ‘transmitting’ in the business brief meant sending information that had not previously been provided. This was how the word was used elsewhere in the business brief. The fourth component should effectively be the first time the merchant acquirer appears in the process.
HMRC also argued that the business brief had to be read in the light of Bookit; and, in that case, it was clear that the company was dealing directly with the card issuer.
As a sophisticated and well-advised taxpayer, the company must have known that it did not fall within the facts of Bookit and could not, therefore, rely on any legitimate expectation under the business brief.
Basis of legitimate expectation
The principle that a person can have a ‘legitimate expectation’ that HMRC will act in a particular way is well established.
The tribunal referred to the principles summarised by Leggatt J in R (GSTS Pathology LLP & Ors) v HMRC  EWHC 1801 (Admin) that legitimate expectation arises where:
‘1. the claimant has an expectation of being treated in a particular way favourable to the claimant by the defendant public authority;
2. the authority has caused the claimant to have that expectation by words or conduct;
3. the claimant’s expectation is legitimate; and
4. it would be an unjust exercise of power for the authority to frustrate the claimant’s expectation.’
Put simply: has HMRC promised to treat taxpayers in a certain way, and is it fair for a particular taxpayer to hold HMRC to that promise?
The notion of a bargain between HMRC and taxpayers, although not express in the tribunal decision, is a convenient way to understand the dynamic between taxpayer and tax authority. It is suggested in R (oao Cameron and Ors) v HMRC  EWHC 1174; and R (oao of Palmer) v HMRC  STC 1691, in which Wyn-Williams J referred to ‘conduct equivalent to a breach of contract or breach of representation’. This phrase repeats the position of Lord Templeman in Re Preston  STC 282, who used the same phrase in describing conduct that amounts to a ‘breach’ by HMRC.
Both parties agreed that the business brief was capable of giving rise to a legitimate expectation, but essentially disagreed as to the nature of the bargain between taxpayer and tax authority.
Whilst the company argued that it was simply carrying out the type of activities that were the subject of the business brief, HMRC insisted that the company was not only bound by the detailed terms of the business brief, but also had to consider the proper application of the cases underlying the business brief.
Did the company have a legitimate expectation?
The tribunal held that the company had an enforceable, legitimate expectation.
The tribunal considered that HMRC’s interpretation of the Business Brief was overly literal. HMRC’s statements as a public authority should not be ‘dissected with the rigour appropriate to an exercise in statutory construction or interpretation of a deed or contract’ (para 61, referring to R (Mohibullah) v Secretary of State for the Home Department  UKUT 561 (IAC)).
The question is ‘how on a fair reading it would be understood by those to whom it was addressed’ (para 76).
The Business Brief focused on the fourth component: whether the company transmitted the authorisation codes to the merchant acquirer and so brought about the transfer of money. The other steps in the process were presented only as background and were not material to the business brief.
This was also consistent with Bookit itself: whether or not Bookit had contacted the card issuer directly was not relevant to the decision in that case. The tribunal also noted that the same decision was reached in SEC despite the involvement of an intermediary.
There is arguably a tension in the tribunal’s reasoning. If it is just a question of how the business brief is understood, why spend time analysing the basis of the judgment in Bookit?
In fact, it is not so much that Bookit is relevant but, in asking what an ordinary sophisticated taxpayer understood from the business brief, there was no significant gap between the basis of the business brief and Bookit. As such, there was no reason for a taxpayer to have read into the business brief any requirement to have contacted the card issuer directly.
The tribunal’s judgment is significant in confirming that HMRC can be held to reasonable interpretations of its statements that do not depend on the ‘rigour’ of statutory interpretation and may not be what HMRC intended.
In some cases, the technical nature of a taxpayer’s business (such as the niceties of card processing) may mean that HMRC does not even properly understand how its statements are being applied in practice. Indeed, at times in the judgment, the tribunal appears sceptical as to whether there was ever any difference between how Bookit and Vacation Rentals actually processed card payments.
The requirement of fairness
HMRC had suggested that any challenge based on legitimate expectation also required a taxpayer to show there had been ‘conspicuous unfairness’ (see R (Unilever) v IRC  STC 681). Where a sophisticated taxpayer has access to high quality advice, they should be required to make up their own mind whether they fall within the scope of the exemption.
The tribunal accepted that there may be reasons why a public authority can legitimately frustrate a taxpayer’s expectation, but in the case of an express HMRC assurance, the onus was on HMRC and it had not begun to discharge that heavy burden.
The fact that the taxpayer was well advised was therefore only relevant to whether it was reasonable to expect that those reading the guidance would rely on the guidance alone. Given that the tribunal considered the facts of the company were in line with Bookit and the terms of the business brief, it had no difficulty in holding that any advice that the company did obtain would have confirmed that it could rely on the business brief.
Consequences of Vacation Rentals
It is welcome that the tribunal upheld the importance of HMRC’s guidance. Nonetheless, the case serves as a reminder that the conditions for relying on judicial review are daunting.
In this case, the business brief was plainly intended to provide assurance to taxpayers, but in all cases it is worth asking:
1. What statements are being relied upon? More than one industry practice has grown up on the back of second-hand confirmations of HMRC’s position.
2. Does a taxpayer’s activities fall within terms that are genuinely ‘clear, unambiguous and unqualified’?
Even where an assurance has been given by HMRC, Vacation Rentals asks whether taxpayers are acting consistently with the essence of any statement from HMRC. To that extent, it is necessary for a taxpayer to think for themselves about whether they are genuinely (legitimately) acting in line with established guidance.
Vacation Rentals is ultimately though a warning for HMRC.
HMRC may value the latitude that comes with taxing by reference to its guidance, and taxpayers have historically struggled to win judicial review cases. HMRC does, however, need to go through the laborious business of thinking about how the tax rules apply to particular activities when issuing guidance. If it fails to do so, it may find that courts increasingly hold it to taxpayers’ (occasionally optimistic) view of those statements, without the protection of the type of rigour that comes with applying statute.
This article was first published by Tax Journal https://www.taxjournal.com/articles/vacation-rentals-reliance-hmrc-s-business-briefs-17012019