Tax Highlights Awards: Naughtiest Tax Litigant of the Year


A clear win here for the U.K.’s HM Revenue & Customs – barred from taking any further part in a VAT test case because it failed to comply with an “unless” order of the First-tier Tribunal (BPP University College of Professional Studies v HMRC[2014] UKFTT 644 (TC)). 

The case concerned a change, made in 2011, to the zero-rating regime for books. The 2011 amendments added Notes (2) and (3) to Group 3 of Schedule 8 to the Value Added Tax Act 1994. Under Note (2), a supply of goods is excluded from the benefit of zero-rating if it is ‘connected with’ a supply of services and those connected supplies are made by different suppliers. Note (3) provides that, for the purposes of Note (2), a supply of goods is connected with a supply of services if, had those two supplies been made by a single supplier, they would have been treated as a single supply of services, and that single supply would have been a taxable supply (other than a zero-rated supply) or an exempt supply.

The meaning and effect of those provisions would have been tested in proceedings between HMRC and BPP University College of Professional Studies (UC), the representative member of a VAT group that included BPP Learning Media Ltd (LM). For some year, LM has made supplies of books to students who also receive a standard-rated supply of education from PE, a company in the BPP Holdings Ltd (Holdings) VAT group. Prior to a corporate reorganisation in 2006, the books had been included within a single standard-rated supply of education by a company within the Holdings group.

In its Statement of Case, which was itself served three weeks late, HMRC asserted that the supply of printed matter by LM was “connected with” the supply of education services by Holdings, and that accordingly the supply of books by LM fell to be standard-rated. No further details were provided to support that assertion. When HMRC proved reluctant to commit itself to a deadline to comply with a request from UC for further information, the First-tier tribunal made a so-called “unless” order, directing that HMRC could be barred from taking any further part in the proceedings if it failed to reply by a specified date.

HMRC duly served the reply by the specified date – or, more accurately, purported to serve the reply. For on the critical question of “connected with”, it merely stated that the supply by LM was “connected with” the supply by Holdings because, if those supplies had been made by a single supplier, they would have been treated as a single supply of services and that single supply would have been a taxable supply. In other words, the reply did nothing more than repeat HMRC’s assertion that the supplies were caught by the 2011 amendments.  Left none the wiser, UC applied for an order barring HMRC from taking any further part in the proceedings because it had failed to comply with the “unless” order.

Shortly before the hearing, but almost eight months after the Statement of Case had been due, HMRC, through its counsel, provided 16 paragraphs of facts and matters relied upon in support of its contention that the two supplies were “connected with” each other. The default, it argued, had therefore been remedied. The judge didn’t agree. UC had suffered prejudice through the delay, and that couldn’t be remedied. Although the information in the 16 new paragraphs was adequate, its production now made even more  inexplicable HMRC’s failure to provide it in the first place.

Nor, said the judge, should HMRC be treated leniently because this was a test case. HMRC had been “given a very clear warning by the unless order that a failure to comply with the directions might lead to them being barred. They can scarcely complain, having failed to comply, that they did not know they were at risk of being barred.” True, barring was a draconian sanction, but it was the appropriate one in this case.

Thus it was that HMRC, a body never slow to remind taxpayers of the importance of complying with their legal obligations, was packed off to English litigation’s equivalent of the naughty step for failing to comply with its own obligations.

Dr Craig Rose, Technical Editor, Global Tax Guide

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