Could tax appeals challenging incorrect advice from HMRC be about to get easier

In recent years, the First-tier Tax Tribunal has consistently ruled that it does not have jurisdiction to hear appeals that are based on ‘legitimate expectation’. In the tax world, these most often arise where a taxpayer has relied on advice or guidance from HMRC that later proves to be incorrect and suffers an adverse tax consequence as a result. So, although it transpires that, under the letter of the law, the taxpayer is liable, they argue that they should be excused from paying the resulting tax bill as they had reasonably relied on a statement from a public authority.

Without the option of appealing to a tax tribunal, these arguments can currently only be pursued by the more complex and expensive route of judicial review, which must be brought through the High Court. While a few have done this (usually large businesses who are well resourced to pay for tax advice and legal representation) and some have won, most taxpayers abandon their appeals when faced with this challenge.  

Meanwhile, disputes over the accuracy of HMRC guidance and its consequences are all too common, and the unexpected tax bills that result may be substantial, particularly if an error has run for some time. This could permanently damage a business, which seems harsh if a taxpayer has made efforts to comply but been misled. Therefore, in some recent consultations and official reports on the tax system, stakeholders have called for the government to introduce a simple judicial review function in the tax tribunals to deal with this type of dispute.

So far, the government and HMRC have not taken any steps in that direction. However, the Upper Tribunal’s August 2021 decision in KSM Henryk Zeman SP Z.o.o. v Revenue and Customs, concerning a dispute about a belated application to register for VAT, may push this further up the agenda. Although the judge ruled in favour of HMRC, deciding that it had not given KSM misleading advice in this particular case, it found that the tax tribunal did in principle have jurisdiction to hear KSM’s legitimate expectation argument. The tribunal was of the view that the eligibility of each of the ‘appealable decisions’ listed in the VAT law to include such arguments should be considered individually, and that a legitimate expectation defence could be used when appealing against the particular type of VAT assessment received by KSM. 

The Upper Tribunal’s comments concentrate on a relatively narrow set of circumstances and do not offer clear views on the position of other types of VAT appeal, let alone whether legitimate expectation based appeals can be used in similar disputes relating to direct tax. These are undoubtedly more numerous and often hit smaller and unrepresented taxpayers, who naturally assume HMRC guidance must be correct. However, the Upper Tribunal has bravely chosen to tackle the difficult question of tribunal jurisdiction head on and has done so in an appeal where it could easily have opted not to comment at all. This suggests that it is well aware of the difficulties in the current system and wants the courts and tax authorities to take the issue seriously.

The KSM decision is certainly not a green light for taxpayers to take HMRC to tribunal over every allegation of inaccurate guidance or advice. Indeed, even if they can be heard as an appeal at the First Tier Tax Tribunal instead of at the High Court, legitimate expectation-based appeals are notoriously tough to win and tax disputes will be no exception. But KSM may remove one major legal hurdle from the path of some taxpayers who feel they have been let down by inaccurate guidance from HMRC result, and could put pressure on the government to give other taxpayers an easier path to legal redress in the future.