This is the third of a three part series of posts cataloguing recent administrative law cases concerning tax. In this, the recent Administrative Court case of R (Veolia and Viridor) v HMRC is explored. It is particularly fitting that this would be the final part to the series, as each post has had to deal with essentially the same issue, namely whether the taxpayer concerned could rely upon an HMRC statement. But in each, a different, and more complex angle has had to be assessed. In educational circles, we call this “ratcheting up the complexity”.
Thus whilst in Biffa Waste, the issue was whether the circumstances of the taxpayer fell within the clear terms of an HMRC ruling, in ELS Group, the issue was whether the circumstances of the taxpayer fell within the ambiguous terms of HMRC guidance. In Veolia and Viridor then, the issue is whether the taxpayers, whose circumstances fell within the favourable terms of an HMRC representation, could have the favourable treatment rescinded later when HMRC changed its stance. Regular readers will note the similarity between this case and that of R (Hely-Hutchinson) v HMRC (see my case-note here)
Veolia and Viridor concerned landfill tax. In brief, landfill tax is chargeable on waste which is disposed. In 2009, HMRC adopted a position such that waste which is put to use on the landfill site was not taxable. This was explained in general guidance. The taxpayers ‘Veolia’ and ‘Viridor’ claimed that ‘soft’ waste, known as ‘fluff’, which was in turn used on the outside layers of waste cells, was not taxable (just to be specific, the claims related to side fluff and bottom fluff). HMRC agreed to these claims in principle, and this was communicated directly to the taxpayers concerned. For Viridor, they remitted in part the tax that had been paid and would remit the rest subject to ironing out specific details (in relation to unjust enrichment). For Veolia, no tax had been remitted.
Then, HMRC changed its stance. It would not claim back the money already remitted to Viridor, but refused to honour the commitments to Veolia and in respect of the remaining monies to Viridor.
Was this kosher?
As with Biffa Waste, the court had to assess whether a legitimate expectation arose. In this respect, was there a clear, unambiguous representation devoid of relevant qualification? And did the taxpayers disclose all material facts? Unlike Biffa Waste, however, the Court also went on to consider whether the frustration of a resulting legitimate expectation was so unfair as to amount to an abuse of power.
For the taxpayers, the court held that the initial HMRC guidance lacked the requisite clarity to arouse a legitimate expectation. However, the assurances from the HMRC officers were sufficiently clear (as an aside, the officers were merely applying an internal policy document which stated that such claims should be honoured. This highlights both the importance of soft-law publications in the internal administration of the tax system, and how such unpublished policy documents may give rise to rights in the hands of taxpayers). Moreover, the taxpayers had disclosed all material facts (although counsel for HMRC had tried to argue that the taxpayers had sought to pull the wool over HMRC’s eyes).
Accordingly, the Court moved to considering whether in the circumstances it would have been so unfair as to amount to an abuse of power to frustrate the legitimate expectations. In previous cases, it has been noted that in such an instance the Court should seek to differentiate between conduct which is “‘a bit rich’ but nevertheless understandable – and on the other hand a decision so outrageously unfair that it should not be allowed to stand” (Unilever  STC 681, p. 697c). Put another way, the Court must inquire as to whether the decision adopted was a “proportionate response… having regard to a legitimate aim pursued by the public body in the public interest” (Nadarajah  ECWA Civ 1363, para 68).
In the case of Viridor, it was held that it was not. The Court had regard to several factors in arriving at this conclusion. First, there could only actually be significant unfairness if the true position as a matter of tax law is that the fluff was in fact taxable. Second, this is not a case of the paradigm type where a taxpayer arranges their affairs in light of an expectation. Third, Viridor had received substantial repayments, whilst fourthly, only the remainder in respect of “externals” was outstanding (this is the amount of profit Viridor claimed it had lost). Fifth, it was not a case where failure to repay Viridor was likely to leave it exposed to claims from its own customers. Sixth, there was little detrimental reliance on the part of Viridor, other than fees for trying to seek repayment and arranging for claims in turn to be made by customers.
These factors all largely collapse into one, namely that Viridor would not actually suffer any financial detriment from the legitimate expectation being frustrated. As landfill tax is an indirect tax, charges should be borne by customers and any repayments from HMRC should be likewise repatriated to them. Viridor was claiming for lost profits, but would be unjustly enriched if it were not to pass on the monies to its customers (although it claimed that it would). Accordingly, the company itself did not suffer in either event. Issue can be taken with this as it has long been established that detrimental reliance is only a factor in the assessment, but in this case it was de facto the only factor considered.
Veolia’s claim differed slightly from Viridor’s. The former added that to have not received any repayment was comparatively unfair, given that its competitors had received repayments from HMRC. Again however, this claim failed effectively on the ground of detrimental reliance. The repayments to the competitors (with the exception of Viridor) related only to what the judgment characterised as “internal” claims, ie where the landfill operator bore the landfill tax. They did not relate to “external” claims ie for lost profits. Veolia however was claiming only in respect of “externals”, which had not been repaid to the cohort competitors (except in respect of Viridor). To this end, it was not comparatively unfair not to remit any amounts to Veolia.
Again, this case aligns with ELS Group and is distinguished from Biffa Waste in that the Court and HMRC placed greater emphasis upon whether the repayment itself was lawful. The Court at several points stressed that the claim for unfairness only had merit if the legitimate expectation was distinct from the true legal position. Counsel for HMRC also sought to argue that the repayment would be ultra vires HMRC, but this point was not dealt with as the Court ultimately found in favour of HMRC (although judge expressed doubts about the contention).
More broadly, the case highlights the difficulty in winning legitimate expectations cases in tax. In order to succeed, satisfying the judge that a legitimate expectation has arisen is just one of the hurdles. A second, even more difficult hurdle is then convincing the Court that failure to grant the taxpayer the favourable treatment expected (which is probably not in line with the underlying law) is somehow conspicuously unfair: that it is outrageously inequitable that the taxpayer is refused a benefit not strictly owed.