Treasures of Brazil Ltd vs HMRC: Legitimate Expectation in UK VAT Law

The First-tier Tribunal (FTT) published its ruling in the case between Treasures of Brazil Ltd (ToB) and HMRC regarding voluntary VAT registration due to the expectation that the VAT threshold will be exceeded soon. Due to the delays in the VAT registration process, the situation became complex for the ToB, which, in the end, resulted in court proceedings.

Matter of the Case and FTTs Ruling

Upon submitting the VAT registration voluntarily VAT registration due to reasonable expectation that it will exceed the VAT threshold in the UK, the ToB received a response from the HMRC stating additional documents are required and that ToB should not get any software or charge VATuntil the registration process is completed. Moreover, the HMRC stated that it usually takes around 30 days to complete the VAT registration procedure.

In the end, the process lasted for three months, but the letter confirming the VAT registration confirmed that the registration was completed within the 30-day deadline. However, the HMRC accepted the ToB complaint that the confirmation letter had the incorrect date. Still, the difference between when the registration was completed and when the ToB received the notification was 11 days.

ToB immediately updated its system and documents and charged VAT for jewelry and bag sales. However, in the following VAT return, ToB did not account for any VAT on sales but requested a credit for input VAT of GBP 4.5 million.

The HMRC was curious about why no output VAT was charged, where the ToB stated that it should not be penalized for HMRC's poor communication and inefficiency and that it acted upon the instruction that HMRC gave. Finally, the HMRC issued a notice with adjusted input and output VAT amounts and requested a net GBP 6.5 million. The ToB appealed against this decision.

After carefully examining the merits of the case and applicable VAT rules and regulations, the FTT ruled that the ToB had legitimate expectations that it was not required to collect VAT because its VAT registration was still in process and pending. Therefore, ToB was right to only charge and collect VAT once it received a confirmation that the VAT registration process was completed.

Conclusion

The FTT decision is vital for taxable persons since it shows that they can, in certain situations, raise legitimate expectation arguments and appeal before the FTT. However, legitimate expectation arguments are generally reserved for the High Court to consider.

Ultimately, the case represents a real-life situation where the governing bodies do not respect the deadline and how taxable persons can react in those situations.

Source: First-tier Tribunal Tax Chamber - Case Number: TC09325