This case examined online filing of VAT returns and electronic payment of VAT and whether the requirement to pay and file online represented a breach of human rights or a breach of EU law

Background

This test case dealt with the appeals of four taxpayers, each of whom appealed against notices served by HMRC mandating them to file their VAT returns online and pay VAT electronically. Compulsory VAT online filing was introduced for all businesses with a turnover of over £100,000, and any newly registered business, with effect from 1 April 2010 and for all businesses with effect from April 2012.

The hearing was in the nature of a test case after approximately 100 taxpayers filed appeals against notices to file online, in both VAT and PAYE cases. The first three taxpayers were selected as test cases on the grounds that they offered a representative selection of fact patterns of persons who might have difficulties in filing online which included factors such as living in remote locations and being of a particular age/having disabilities which rendered them unable to use computers and file online. The fourth appeal represented the risks of filing VAT returns and paying VAT online was such that the law should not compel a business to do so.

HMRC's position was that the Tribunal had no jurisdiction to consider the cases under either public law or the European Convention on Human Rights and thus the appeals should be dismissed for lack of jurisdiction. The taxpayers' only challenge to the notices requiring them to file online should have been to initiate a judicial review of HMRC in the administrative division of the High Court or make a complaint to the European Court of Human Rights.

The case of the three taxpayers was that online filing is a breach of their human rights, a breach of domestic public law and a breach of their rights under EU law. In order to determine this as a matter of law, the Tribunal considered detailed factual information which was provided to the Tribunal by each taxpayer and HMRC and answers to a number of questions such as:

• Why don't the taxpayers use a computer?
• How much money does online filing save HMRC?
• How much money does a computer cost?
• How much money does using a profession agent cost?
• Is a disabled person less likely to use a computer?

Tribunal's Jurisdiction

The Tribunal found that as it is a statutory body, their jurisdiction can only be to hear cases which statute has given it authority to hear. Tribunals have no inherent jurisdiction and neither the Treaty establishing the European Union nor the Convention on Human Rights can confer jurisdiction on it. Thus it only has jurisdiction over questions of EU law or human rights or public law if Parliament has conferred such jurisdiction on it.

The Tribunal's jurisdiction in VAT matters is contained in Section 83(1)(zc) of VATA which provides as follows:

• “...an appeal shall lie to a tribunal with respect to any of the following matters –
• (zc) a decision of the Commissioners about the application of regulations under section 135 of the Finance Act 2002 (mandatory electronic filing of returns) in connection with VAT (including, in particular, a decision as to whether a requirement of the regulations applies and a decision to impose a penalty)”

HMRC favoured a narrow interpretation that allowed the Tribunal only to consider (a) whether a penalty for failure to file online had been properly imposed or (b) whether the taxpayers were specified persons. In HMRC's view, the former was irrelevant in the appeal as no penalty had yet been imposed on the taxpayers and the latter was irrelevant as the taxpayers conceded that they are specified persons for the purpose of online filing.

The taxpayers contented that the structure of section 83, and the reference to the Tribunal's jurisdiction “including whether a requirement of regulations applies or the imposition of a penalty”, implied that the Tribunal's jurisdiction covers more than just those two items.

Numerous cases were considered by Tribunal in reaching its decision that Section 83(1)(zc) did provide the Tribunal with jurisdiction to consider the appeals.

The Tribunal then turned to consider its jurisdiction to consider the European Convention on Human Rights (“the Convention”) and to what extent the Convention is relevant when considering the lawfulness of the decision that the four taxpayers should file online. Section 3 of the Convention was used as an aid to interpretation of the legislation requiring in subsection 1 thereof that:

• “So far as it is possible to do so, primary legislation and subordinate legislation must be read and given effect in a way which is compatible with the Convention rights.”

The Tribunal held that primary and secondary legislation must be read in so far as possible as consistent with the Convention. This goes well beyond giving legislation a purposive interpretation: the legislation must be read as consistent with the Convention if at all possible to do so. Therefore this applies whenever the Tribunal exercised its jurisdiction under Section 83.

As a result, the Tribunal held that certain courts are empowered and have the necessary jurisdiction to declare, where appropriate, primary legislation and secondary legislation incompatible with the Convention.

Furthermore, it was accepted by all parties that sections 83 (1)(zc) gave the Tribunal jurisdiction to consider whether Regulation 25A was lawful under the Principle VAT Directive and EU Treaty, as this jurisdiction is conferred by the European Communities Act 1973.

Concessions

In the course of the case HMRC had cited two concessions available to the mandate to file online, 1, Telephone filing and 2, the Enquiry office concession. HMRC's view was that both these concessions showed that there was no question of HMRC having failed to take sufficient account of the interests of elderly or disabled persons.

Telephone Filing

The Tribunal concluded that telephone filing would inconvenience the taxpayers in the running of their business particularily where it would be necessary to temporarily close the business to take the pre-arranged call at the time arranged. There was no information in the public domain about the telephone filing service offered by HMRC to some taxpayers and it was HMRC's policy not to publish information about it as a means of restricting the number of persons who apply to use it.

The Tribunal held in so far as the issue of disability is concerned, that while it is legitimate to restrict a concession to only those meeting its terms (in this case the disabled), this legitimate objective could not be achieved by not publishing the concession and then, for those few taxpayers who did find out about it anyway, granting the concession without checking that they are entitled to it. Operating a concession in this way restricted the number of persons seeking to benefit from it, but also failed to ensure either that those who are entitled to it get the benefit of it, and secondly, those that do receive the benefit of it are actually entitled to it.

HMRC were under the mistaken view of the law that telephone filing was concessionary assistance with online filing whereas it was simply a concession which permitted a different form of filing by telephone. This concession in the form in which it was given was not a concession which HMRC had as a matter of public law power to give. Thus the telephone filing concession could not be relied on by HMRC as justification for the failure of Regulation 25A to exempt the old, disabled, or those living remotely because it post-dated the decisions at issue and was unlawful in any event.

Enquiry Office Concession

The Tribunal found this concession to be a form of assistance with online filing. However, the Tribunal found the same criticism of secrecy could be made of the enquiry office concession, and for the same reason as with telephone filing found that HMRC could not rely on it as a remedy.

Decision

Having established the Tribunal's jurisdiction and the facts in the case, the Tribunal moved on to consider whether Regulation 25A or 40(2A) involved a breach of the taxpayers' human rights or was unlawful under the EU Treaty.

To determine whether there is a breach of human rights it was necessary to determine all the possible methods of compliance which the taxpayers could adopt and for the Tribunal to determine if at least one of them does not involve a breach of human rights. If at least one of them does not, then the regulations are lawful so far as the Convention is concerned.

Some of the possible methods of compliance discussed were as follows:

• The taxpayer could use his own computer and internet link.
• The taxpayer could use a friend's or family computer.
• The taxpayer could use a public computer.
• The taxpayer could engage a professional agent to make the online submission.
• A friend or family member could make the online return submission on behalf of the taxpayer.

The Tribunal then considered the potentially relevant articles of the Convention in the context of the various methods by which the taxpayers could comply with the obligation to file online.

HMRC's justification for online filing is that it saves them costs. So far as the obligation to file online forces a taxpayer to use the services or possessions of their friends and family, the Tribunal had to consider if this was justified by HMRC's cost saving motivation. The Tribunal found it was an extraordinary proposition that HMRC could compel a taxpayer to take advantage of friends and family in order to comply with his tax filing obligations.

Overall the Tribunal found that disability, age and computer illiteracy were all relevant under the Convention. It then considered whether the taxpayers have been discriminated against on the basis of their possession of any one of these protected characteristics.

The Tribunal held that computer illiteracy was as much a protected characteristic as disability or old age and concluded that the methods of complying with the obligation to file online all involved indirect discrimination against the elderly, disabled and those living remotely. The Tribunal further held that these were not justified.

In summary the Tribunal's decision in respect of the three taxpayers was as follows:

• S 83(1)(zc) VATA gave the Tribunal jurisdiction to consider the lawfulness of the decision issued by HMRC that the three taxpayers must file online;
• Consideration of the lawfulness of those decisions extended to whether the regulations themselves were lawful under the Convention or under the Principle VAT Directive;
• It also extended to a limited extent to consideration of whether they were lawful under national public law.

The Tribunal found that because of its disproportionate application to persons who are computer illiterate because of their age, or who have a disability which makes using a computer accurately very difficult or painful, or those who live too remotely for a reliable internet connection, that the regulations were an interference with Convention rights under A1P1 (right to property) and A8 (right to private life) combined with A14 (right not to be discriminated against) which was not justified.

So far as EU law was concerned, the Tribunal found the obligations to be disproportionate because they failed to make exemptions for the elderly, disabled persons or persons living too remotely for reliable internet access.

For these reasons, HMRC's decision, to apply regulations was unlawful and for that reason the taxpayers' appeal was allowed.

In respect of the fourth taxpayer the Tribunal decided as follows:

• S 83(1)(zc) only gives jurisdiction to consider the legality of the decision that it must file online and as that necessarily carries with it the liability to pay electronically, the Tribunal could also consider whether that obligation was lawful.
• So far as the obligation to file online was concerned, this by itself was not unlawful under the Convention, under EU Law or as a matter of UK public law.
• The degree of the risk as claimed by the taxpayer was not shown.
• The taxpayer failed to demonstrate that there was a breach of the right to a private life and the right to respect for correspondence.

The Tribunal did not find the obligation to file online or to pay electronically to be a breach of UK public law. In particular, they were not unlawful under the primary enabling legislation. So far as EU law was concerned, the Tribunal did not find there to be a breach of the Charter, nor were the regulations as they applied to the fourth appellant disproportionate.

The fourth taxpayer's appeal was dismissed.

The full text of the case is available at http://www.financeandtaxtribunals.gov.uk

Chartered Accountants Ireland commentary

This case is not being appealed by HMRC. At the time of going to writing, HMRC have launched a consultation “Assistance with electronic filing of VAT returns” which is seeking views on factors to take into account in amending the VAT Regulations, improving guidance for businesses having difficulty filing VAT returns online and the accessibility and convenience of the VAT Filing by Telephone service. This is in direct response to the above Tribunal decision. The Northern Ireland Tax Committee of Chartered Accountants Ireland will be making a submission in relation to the above consultation. This will be published in tax.point.