UT (Tax & Chancery) UT/2022/000103 - [2024] UKUT 00183 (TCC)

Further, it was common ground before the FTT that TTSL brought the Assessment Appeal pursuant to section 83(1)(p) VATA 1994, whilst the Claim Appeal was made pursuant to section 83(1)(c) VATA 1994:

The FTT summarised its conclusions on the extent of the deeming under section 85 at [149]:

TTSL says that the FTT was wrong in law in concluding that the deemed determination under section 85(1) extended to the technical analysis of HMRC on which the Assessment for the Overlap Period was based. All that should be treated as being upheld was the Assessment itself. If that is right, then the FTT was wrong when it found at [222] that TTSL would be barred from appealing by issue estoppel, which is Ground 4.

The FTT referred at [194] and [195] to Lord Keith’s description of issue estoppel in Arnold v National Westminster Bank Plc [1991] 2 AC 93 (“Arnold”) at p105 and the exception to its application at p109:

It is also worth pointing out at this stage that the FTT correctly recognised at [199] that issue estoppel has a more limited role in tax appeals, following the Privy Council judgment in Caffoor v Income Tax Commissioner [1961] AC 584. In the context of certain taxes, liability for tax in one period may be treated as a different issue to liability for that tax in another period. This is known as the “Caffoor principle” to which we return below.

The question on this appeal is whether TTSL’s entitlement to input tax credit in the Overlap Period was a necessary ingredient in its cause of action in the Assessment Appeal. That depends on the extent of the deeming prescribed in section 85. The approach to construing deeming provisions was considered by the Supreme Court in Fowler v HMRC [2020] UKSC 22 where Lord Briggs gave the only judgment and set out at [27] the following guidance:

The FTT considered the purpose of section 85 at [136] – [142]. It is agreed that the purpose of the section is to prevent re-litigation where the parties have reached an agreement in relation to the decision under appeal, and where an appellant withdraws an appeal. The area of dispute is whether that purpose extends to preventing re-litigation in the circumstances of this case. TTSL’s case is that the effect of section 85 is that TTSL could not challenge the Assessment in a new appeal against the Assessment. The FTT considered that such a limited construction denudes the section of having any real effect and could open the gates to re-litigation on the same issue where an appellant withdrew its appeal against an assessment.

In finding that the deemed determination under section 85 extended to the reasons for the decision under appeal, the FTT distinguished two types of appeals at [130] – [135]: first, VAT appeals in which only the quantum of an assessment is in dispute; and second, appeals in which it is said that HMRC have wrongly assessed a supply which is not subject to VAT. The FTT said as follows:

Mr Jones KC submitted that the FTT’s conclusion that the decision upheld must import the reasons for the decision was wrong. He submitted that all that was treated as being upheld under section 85 was the Assessment. The effect of that deeming was simply that HMRC could collect the tax due pursuant to the section 73(9) without any further challenge. Section 73(9) provides as follows:

We do not see that the FTT’s distinction between an appeal against quantum and an appeal against liability to VAT assists in construing section 85 and identifying the extent of the deeming on withdrawal of an appeal. It appears that the FTT drew this distinction in response to its understanding of an argument by Mr Jones KC that the deeming effect of section 85 extends only to the quantum of an assessment. But that is not how we understand Mr Jones KC’s argument, which is that all that is treated as being upheld is the assessment, so that HMRC could collect the tax due under the assessment. However, it seems to us that the consequences which inevitably flow from an assessment being upheld without variation at least include that the appellant’s grounds of appeal have been rejected by the tribunal. Parliament certainly intended that section 85 would prevent re-litigation, and we see no reason why Parliament would not want to prevent re-litigation of any issues which were raised in the appeal before it was withdrawn.

It is not clear why the FTT concluded that when an appeal is withdrawn, the effect of section 85(1) is that the decision is upheld and that “must import the reasons for that decision”. In our view, what is deemed to be determined are the grounds of appeal relied on by the appellant which have implicitly been rejected. As Mr Elliott submitted, the sole issue in the Assessment Appeal was whether input tax was allowable on the investment management services. The FTT’s overall conclusion that, on the facts of this case, issue estoppel prevented TTSL from re-litigating its entitlement to input tax credit remains good. TTSL’s grounds of appeal in the Assessment Appeal were that input tax credit was available to TTSL.

Mr Jones KC submitted that the scheme of section 73, including section 73(9), is that an incorrect return can lead to an assessment. If there is no appeal against the assessment, then the amount of the assessment is deemed to be an amount of VAT due from the taxpayer. If there is an appeal, then the assessment stands unless the taxpayer shows that it is wrong. The burden of establishing that the assessment is wrong or overstated lies on the taxpayer.

That is true as far as it goes (see Tynewydd Labour Working Men’s Club and Institute v HM Customs & Excise [1979] STC 570 at 580 d-f and Grunwick Processing Laboratoruies Ltd v HM Customs & Excise [1987] STC 357). Mr Jones KC further submitted that, as a consequence, there is no need for a tribunal to determine anything on an appeal against an assessment for the assessment to be upheld. If an appellant does not satisfy the tribunal that the assessment is wrong or overstated then it will be upheld. It is not relevant to know what grounds of appeal were put forward. The proviso within s.73(9), that the VAT is deemed to be due “subject to the provisions of this Act as to appeals” exists simply to ensure that the taxpayer’s ability to challenge an assessment is not nullified. Mr Jones KC submitted that the fiction created in this case by section 85 was that the Assessment had been upheld without variation. It does not flow inevitably from that fiction that the underlying merits of the Assessment have been determined.

Ingenious though they are, we do not accept those submissions. A tribunal must at least make a finding that the appellant has not satisfied it that the assessment is wrong or overstated. That finding does in our view “inevitably flow from the fiction being real”. In order to make that finding, the tribunal must consider the grounds of appeal to see if the appellant has made out its grounds. If the tribunal is not satisfied that the appellant has made out one or more of its grounds of appeal then the appeal will be dismissed and the assessment will stand. Translated into section 85, where an appeal is withdrawn, the consequences must include that the appellant has failed to make out its grounds of appeal, whether those grounds relate to quantum, liability to output tax or entitlement to input tax credit. The FTT rejected TTSL’s submissions on section 73(9) at [126] – [129]. We consider that it was right to do so, albeit our reasons differ from those of the FTT.

Mr Jones KC submitted that there would be difficulties in practice with the construction put forward by HMRC and accepted by the FTT. For example, HMRC’s assessment might not have been based on any considered technical reasons. HMRC might not have been in a position to know the underlying facts. There might be issues which neither side appreciated at or before the time of withdrawal. However, we do not see any difficulty if the extent of the deeming is governed by and limited to the grounds of appeal relied on by the appellant.

Mr Jones KC submitted that there would be difficulties if HMRC gave alternative reasons for an assessment and the grounds of appeal challenged those alternative reasons. That is not the case here, and if such a case were to arise then it would be necessary to work out exactly how far the deeming extended on the particular facts. The sole basis for the Assessment in the present case was that input tax credit was not available in relation to the supplies of investment management services. The parties well understood that was the issue as identified in TTSL’s grounds of appeal in the Assessment Appeal.

Mr Jones KC submitted that there is nothing in the wording of section 85 which takes the effect of the deeming further than section 73(9). In response, Mr Elliott submitted that the effect of section 85(1) is that it is deemed “for all purposes” that the tribunal had determined the Assessment Appeal by upholding the Assessment without variation. He emphasised the reference to all purposes, not just for the purposes of section 73(9). We agree with Mr Elliott that this statutory language supports our construction of section 85.

We consider that Parliament intended that section 85 could give rise to an issue estoppel. There is no reason it should not do so, subject to the exception described in Arnold. We consider it likely that Parliament would have had issue estoppel in mind in enacting section 85 and providing that the deeming takes effect for all purposes.

Mr Jones KC submitted that his interpretation of section 85 in the context of a withdrawal was consistent with the decision of the High Court in Matalan, which concerned the customs classification of swimwear product lines. The FTT considered Matalan in detail at [152] – [176], but concluded that it was not authoritative on the meaning and effect of section 85. We agree with that conclusion. Very briefly, the trader in Matalan claimed repayment of duty on items of swimwear and also applied for a binding tariff information (“BTI”) for a specific product line. HMRC issued a BTI for a sub-heading which gave rise to a higher rate of duty than that sought in the taxpayer’s application. The BTI was confirmed on review and the taxpayer appealed to the tribunal. Shortly before the hearing, HMRC withdrew the disputed decision, the BTI, and at the same time invited the taxpayer to withdraw its appeal. The taxpayer did withdraw its appeal.

Thereafter, the taxpayer made another claim for repayment of duty, but HMRC only agreed to repay duty on the single product line for which it had given the original BTI. That decision was confirmed in a statutory review, in which HMRC stated that the taxpayer was required to establish its claim for each separate product line.The taxpayer contended that there had been an agreement within section 85 in relation to the first appeal, and as a consequence there was a deemed decision that classification at the lower rate of duty was correct. The VAT Tribunal held that there was no agreement within section 85 because HMRC had unconditionally withdrawn the disputed decision. Clarke J, as he then was and sitting in the High Court, agreed that there was no issue estoppel and no abuse of process by HMRC. Neither party argued that the taxpayer’s withdrawal of the first appeal engaged section 85. We agree with the FTT in the present appeal at [176] that that was probably because it was considered that once HMRC had withdrawn the disputed decision there was no “decision under appeal” on which the deeming provision could operate. In the circumstances, we do not consider that Matalan provides any assistance in construing section 85.

We should also add that there is nothing unjust, absurd or anomalous in concluding that the effect of section 85 in the present case is that the tribunal is deemed to have determined the sole issue raised in the Assessment Appeal, that input tax on the investment management services was not allowable; rather this is simply an inevitable corollary of the deemed state of affairs and is consistent with (i) the purpose of section 85 and (ii) the reality that, by withdrawing the Assessment Appeal, TTSL was conceding the issue. It is a sensible conclusion on the facts of this case where TTSL is clearly seeking to re-litigate the same issue that arose in the Assessment Appeal. Indeed, we consider it would be absurd if TTSL could withdraw the Assessment Appeal and then make a claim for repayment of the very sums which had been assessed.

We are satisfied therefore that the FTT was right to find at [222] that if there was no cause of action estoppel, then TTSL was barred by issue estoppel from bringing the Claim Appeal. The consequence of that finding is that the FTT was right to strike out the Claim Appeal and this appeal must be dismissed.