Discretion – the lesser part of Valour Added Tax

Input Tax deduction – alternative evidence

In G B Housley Ltd v HMRC, the Court of Appeal (CA) considered the issue of HMRC’s power to exercise discretion in cases of input tax deduction. Housley had used the self-billed invoices which it had issued to itself to reclaim input tax. However, no formal self-billing agreement existed between Housley and its supplier – a requirement stipulated in the VAT Regulations. HMRC disallowed the input tax claim – on the basis that it would be inappropriate for it to exercise discretion in such circumstances.

The FTT had allowed Housley’s appeal and cancelled HMRC’s assessment finding that HMRC had been unreasonable in making no attempt to consider its discretion – implying that, had it done so, its decision to disallow credit for input tax might have been different. The UT ratified the FTT’s decision on these points, but went on to hold that the FTT should not have discharged the assessment. Instead, the UT argued, the FTT should have given HMRC another opportunity to exercise, or re-exercise, its discretion, considering information now available to it. The assessment was subsequently reinstated.

Following Housley’s appeal, the CA held that, if HMRC had properly considered or re-considered the exercise of its discretion, it would not ‘inevitably’ have disallowed the claim for input tax.

Ultimately this resulted in HMRC’s assessment being cancelled and HMRC being required to consider, using its powers of discretion, whether a new assessment was justified. The sting in the tail for HMRC was that the CA ruled that the normal assessment time limits would apply to any new assessment issued by HMRC.

HMRC’s actions were undoubtedly heavy handed in the above case. Common sense should have prevailed to ensure credit for input tax on what was clearly a taxable supply. The case demonstrates, however, that a taxpayer does not have the burden of proving the outcome of proper discretion for an assessment to be invalid.