The High Court held that the supply of computer hardware and software to the insurance industry did not come within a Customs' ruling that certain services might be exempt from VAT where the insurer had authorised the taxpayer to accept insurable risk on their behalf. Further, a taxpayer was entitled to wait until notification of a tax assessment before seeking judicial review.

Facts

The taxpayer carried on the business of supplying, installing and maintaining computer hardware and software to the insurance industry. It essentially provided communication systems and the taxpayer's software enabled insurance brokers to carry out transactions with those insurers with whom the taxpayer had made previous arrangements and whose electronic communication systems were linked through the taxpayer to the brokers.

The taxpayer claimed that on 25 November 2003, Customs had ruled that the relevant supplies made by the taxpayer were exempt from VAT (‘the disputed ruling’). The taxpayer contended that it had relied to its detriment on the ruling and that under public law principles Customs might not assess the taxpayer to VAT on relevant supplies made during the period beginning with the date of the ruling and ending on 22 April 2004 when Customs effectively withdrew the ruling and told the taxpayer that the relevant supplies were subject to VAT. By notice of assessment dated 12 January 2005, Customs assessed the taxpayer to VAT against which it appealed to the VAT and Duties Tribunal.

There was no issue before the court as to reliance upon the disputed ruling or detriment and, in the light of the ECJ judgment in Staatssecrataris van Financien v Arthur Andersen & Co Accountants c.s. (Case C-472/03) [2006] BTC 5,159, it appeared indisputable that the taxpayer's services at no time were exempt. Thus the taxpayer's appeal to the tribunal was withdrawn on 1 March 2006. That left outstanding the issue of the taxpayer's liability under the challenged assessment in respect of the relevant period. Nor was there any longer any dispute that, on a correct interpretation and application of the relevant law, the supplies made by the taxpayer were at all times subject to VAT and that the taxpayer had to account for VAT on supplies made after the withdrawal of the disputed ruling. However, a question arose as to the meaning and effect of the disputed ruling and whether Customs might assess the taxpayer to VAT for supplies made during the relevant period.

Issue

Whether the taxpayer's activities were within the terms of Customs' ruling on VAT exempt services; and whether the taxpayer was entitled to wait for assessment before seeking judicial review.

Decision

Kenneth Parker QC (sitting as a deputy High Court judge) (dismissing the application) said that the classic statement of the law in the present context was that of Bingham LJ in R v IR Commrs, ex parte MFK Underwriting Agencies Ltd [1989] BTC 561. A statement formally published by the Revenue to the world might safely be regarded as binding, subject to its terms, in any case falling clearly within them. But where the approach to the Revenue was less formal, it would ordinarily be necessary for the taxpayer to show that certain conditions had been fulfilled. First, it was necessary that the taxpayer should have given full details of the specific transaction on which he sought the Revenue's ruling, unless it was the same as an earlier transaction on which a ruling had already been given. He had to indicate to the Revenue the ruling sought and the ruling or statement relied on should be clear, unambiguous and devoid of relevant qualification.

The overarching test was whether the public authority had acted so unfairly that its conduct amounted to an abuse of power and there was clear authority binding on the court that the principle in MFK applied to the administration and collection of VAT and that, if the requisite conditions were fulfilled, Customs officers had the managerial discretion to give rulings about the application of VAT. Customs had also published an ‘extra-statutory’ concession, which broadly reflected the principle in MFK above (R v C & E Commrs, ex parte F & I Services Ltd [2001] BTC 5,266).

In the present case the taxpayer had failed to show that its activities during the relevant period fell within the terms of the ruling. No primary document had been produced to support the claim that insurers appointed the taxpayer as an agent either to make binding offers on their behalf or, on the alternative view of the process of contract formation, to give an acceptance on their behalf of offers made by brokers. The only relevant primary document before the court was the rental agreement between the taxpayer and a broker client which did not refer to the taxpayer as having authority to enter into contracts on behalf of any insurer, or as having any authority to act on behalf of any insurer. No primary document at all had been produced that would shed light on the relationship between the taxpayer and insurers.

Further, the necessary agency between insurers and the taxpayer could not be inferred from the evidence. The taxpayer did not take any decision to make offers of insurance on behalf of insurers. The information necessary for electronic contract formation had been preprogrammed, according to parameters laid down by the insurer, in the taxpayer's computer software. The relevant data was processed automatically by electronic means through that software and the transactions were self-executing within the specified parameters pre-determined in the programme. The taxpayer had to take no decisions to generate the offers; the software performed the necessary tasks.

The result was no different on the alternative view of contract formation, because any acceptance of the broker's putative offer would have been preprogrammed in the software and would have required no decision by the taxpayer. Furthermore, if any error was made in the execution of the contract, that was because the system had malfunctioned, not because the taxpayer had made an error of judgment in deciding to offer insurance on terms that did not accord with its authority as an alleged agent of the insurer. Once it was appreciated that the electronic process of contracting was automated, there was no legal or commercial need for insurers to appoint the taxpayer as their agents to make contracts on their behalf.

The ruling was clear that it was the taxpayer as a business entity that had to have the authority to enter into contracts on behalf of insurers: it was not sufficient that insurers entered into contracts through computer programmes designed by, and running on the taxpayer's information system. In this case the relevant data was transmitted from the taxpayer's information system to that of the insurer. The taxpayer was merely an electronic conduit for the transmission of the information.

As regards the issue of delay, a person placed in the position of the taxpayer was entitled to wait until the notification of an assessment before taking steps to bring proceedings for judicial review. Under VATA 1994, s. 75(9) it was the notification of the assessment which crystallised the legal liability of the taxpayer and, subject to any appeal to the VAT and Duties Tribunal, the amount so assessed was recoverable as a debt due to the Crown (VATA 1994, Sch. 11, para. 5(1)). Until the notification of the assessment it remained uncertain (to varying degrees of probability, depending on the facts of each case) whether Customs would decide to impose liability on the taxpayer.

Queen's Bench Division (Administrative Court).
Judgment delivered 4 May 2007.