Tax claim approval granted following HMRC's incorrect tax rejection for the company
Hotelbeds Wins High Court Challenge Against HMRC
In a significant victory for Hotelbeds, a wholesale supplier of hotel rooms, the High Court in London has ruled in favour of the company in its challenge against His Majesty’s Revenue and Customs (HMRC) over the rejection of evidence for input tax deduction claims worth more than £10 million.
The court found that HMRC’s rejection of the further two claims was improper. The decision contravened the EU principle of effectiveness as the events in question took place before the UK left the EU.
Hotelbeds, which purchases hotel accommodation from UK VAT-registered hotels and resells them to other suppliers on a business-to-business basis, argued that HMRC’s decisions were contrary to the body’s own guidance. The company further stated that there was no risk to the public purse as HMRC had received the associated output tax but had not repaid input tax that it said was due.
The court's ruling is telling, with the judge commenting on the HMRC decision maker having to navigate inconsistent and inapplicable guidance in reaching their decision. The judge ruled that HMRC should have allowed payment, concluding that the decision maker had failed to properly consider the relevant legal principles.
Jake Landman, a tax dispute expert at Pinsent Masons, noted the rarity of a taxpayer successfully winning a judicial review of a HMRC decision. He stated that bringing judicial review proceedings can be the right approach for challenging decisions. Bryn Reynolds, another tax expert at Pinsent Masons, warned that the inconsistent treatment received by Hotelbeds and the difficulties of dealing with HMRC led the taxpayer to move to using the industry's tour operators' margin scheme (TOMS).
Reynolds also suggested that submitting Error Correction Notices (ECNs) when there is a substantial sum at stake, particularly where backed up with good evidence, is still worthwhile for taxpayers. He further stated that judicial review of VAT decision making should be considered as a possible avenue for challenge on both the basis of legitimate expectation and irrationality.
The industry shift to the TOMS removed the incentive for hotels to issue VAT invoices, leading to many hotels no longer complying with their legal obligation. Other factors considered relevant by the court were the absence of risk of fraud, the taxpayer's move to the TOMS, and the payment of the earlier ECNs giving rise to an expectation that later ones would also be paid.
HMRC paid the initial two ECNs but warned of 'serious concerns' and denied subsequent ECNs, arguing that Hotelbeds could have chased suppliers for invoices. However, the court's ruling has set a precedent that may encourage other taxpayers to challenge HMRC decisions in similar circumstances.
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