Queenscourt Ltd v Revenue and Customs (VALUE ADDED TAX - whether dip pots supplied as part of a takeaway meal deal are a separate standard rated supply or whether they are part of a single supply)

We note in particular that, just like the Upper Tribunal in Noor (at [88]) the Upper Tribunal in Zeman (at [74]) focused on what it considered the subject matter of the relevant appeal provision. In Noor , this was the amount of input tax which had to be ascertained by applying the relevant VAT legislation. However, in Zeman (and in this case) the subject matter is the assessment itself (not the amount of the assessment) which must, in our view, include HMRC's decision to make the assessment.

Our conclusion therefore is that there is nothing in the statutory scheme of s 80(4A) and s 83(1)(t) VATA which either expressly or implicitly excludes the Tribunal's jurisdiction to consider public law arguments and, in particular, arguments based on legitimate expectation, in relation to HMRC's decision to make the recovery assessments.

We have to say that we reach our conclusion in relation to this issue with some hesitation. Our own view, in line with the authorities prior to Beadle is that, for the reasons explained in those cases, it would be surprising if Parliament intended to confer on the First-tier Tribunal an ability to routinely consider arguments based on public law grounds in the context of appeals under s 83(1) VATA.

Indeed, it appears to us that the underlying assumption in Metropolitan International (a case dealing with s 84(10) VATA rather than s 83(1) VATA) appears to be that the First-tier Tribunal has no jurisdiction to consider arguments based on legitimate expectation in the context of s 83(1)(p) as it would otherwise have been unnecessary for the appellant to rely on s 84(10) VATA, although the Court of Appeal did not say this in clear terms.

However, as we have explained, we can find nothing in the statutory scheme which is relevant to this appeal which suggests that Parliament intended to exclude the jurisdiction of the Tribunal to entertain arguments based on public law grounds. We were perhaps hindered in that task by the fact that HMRC did not address the detailed analysis of the relevant legislative provisions in their submissions and it may well be that another Tribunal in the future comes to a different conclusion on this point with the benefit of fuller submissions.

Nonetheless, based on our conclusions, we must now consider whether Queenscourt did in fact have a legitimate expectation that HMRC would not make the recovery assessments.

The parties were agreed that the principles the Tribunal should apply in determining whether Queenscourt had the required legitimate expectation were those set out by the High Court in R v Inland Revenue Commissioners, ex parte MFK Underwriting Agencies Limited [1990] 1 WLR 1545 at [1569].

The first requirement is that the taxpayer should put all their cards face upwards on the table. In this case, HMRC accept that, in their error correction notice, Queenscourt did so.

The second requirement is that "the ruling or statement relied upon should be clear, unambiguous and devoid of relevant qualification". In determining this, both parties agree that the Tribunal should consider objectively how the statement or ruling would be interpreted by a reasonable recipient in the context in which it was made.

One point of difference between the parties was that HMRC submits that the particular expertise of PwC (to whom the relevant statement or ruling was made) should be taken into account whereas Ms Brown submits that any special expertise possessed by PwC is irrelevant.

As we have mentioned, the error correction notice was submitted in March 2019. There was then several rounds of correspondence focusing on the way in which the amount of VAT for which Queenscourt was seeking a credit had been calculated. This culminated in an email to PwC from the HMRC officer, Mr Trethewey dated 17 October 2019 in which he said:

Mr Simpson submits on behalf of HMRC that the reference to "this issue" being revisited in the future is a relevant qualification. He further suggests that, even if this might be interpreted as a reference to a potential change of approach in the future (rather than one which might apply to the past) the qualification is ambiguous and therefore the requirement that the statement is unambiguous is not met.

We reject these submissions. In our view, given the correspondence which had previously passed between PwC and HMRC which, as we have said, related only to the calculation of the amounts which were claimed and not to the wider issue as to whether the supply of the relevant items as part of a takeaway meal deal should be zero rated or standard rated, any reasonable recipient of the email would have interpreted the reference to the issue potentially being revisited during any future audit activity as being a reference to the way in which the amounts claimed were calculated and not to the question as to whether the relevant items could be treated as a separate supply and therefore zero rated. This is reinforced by the use of the words "audit activity" which more naturally refer to detailed calculations and apportionments than decisions in relation to points of principle.

This conclusion is not affected by any special expertise which PwC may have in relation to the underlying question as to whether the supplies in question should be zero rated or not given the clear implication that the qualification related only to calculation and apportionment and not to that specific issue.

Given what we have said, we do not consider the qualification to be ambiguous and so the question as to whether this results in the statement not satisfying the requirement set out in MFK does not arise. However, in our view, it is in any event a two stage test. The first question is whether the statement or ruling is clear and unambiguous (which in this case it is). The second question is then whether there is any relevant qualification.

We accept that there may be a relevant qualification if the qualification is itself ambiguous and one possible interpretation amounts to a relevant qualification. However, for the reasons we have explained, we do not consider that the qualification in this case can be interpreted as a suggestion that HMRC may retrospectively decide that the dip pots are in fact part of a single supply and cannot therefore be zero rated.

Mr Simpson also submits that the relevant context for the ruling given by HMRC includes the fact that there is a two year time limit for making a recovery assessment (s 80(4AA(a) VATA). He suggests that, on this basis, the reference to the issue potentially being revisited during future audit activity must have been understood as a reference to the fact that HMRC may change their mind at some point within that two year window.

We do not accept this. Given the background to the statement made, the possibility of HMRC making a recovery assessment on the basis that they had changed their view on whether or not the relevant items could be zero rated would simply not be on PwC's radar. There is certainly no basis for thinking that a reasonable recipient of the email would have made a connection between the statement made and the two year time limit for making any such assessment.

The final requirement is that it would not be fair to depart from the clear and unambiguous ruling. There is no requirement that the person to whom the ruling is given has relied on it to their detriment (see re Finucane [2019] UKSC 7 at [62]).

Although the Court in MFK considered that conduct equivalent to a breach of contract or breach of representation would be sufficiently unfair to prevent any public body departing from a clear and unambiguous statement, it is clear that the law has moved on. Both parties agree that Queenscourt can only rely on legitimate expectation if HMRC's conduct is "conspicuously" unfair or "so outrageously unfair that it should not be allowed to stand" (see R v Inland Revenue Commissioners ex parte Unilever Plc [1996] STC 681 at [697]).

In the context of tax, some guidance on the approach to unfairness was given by the Court of Appeal in HMRC v Hely Hutchinson [2017] EWCA Civ 1075 . The question in that case was whether HMRC could resile from previously published guidance.

The Court of Appeal notes at [37] that part of the context is that the law imposes on HMRC a duty to collect tax and that taxpayers must expect to pay the right amount of tax, referring at [40] to the comment in MFK at [1569] that "the taxpayer's only legitimate expectation is, prima facie , that he will be taxed according to statute not concessions or a wrong view of the law".

The Court of Appeal in Hely Hutchinson also referred to the observation of the Court of Appeal in Samarkand Film Partnership No 3 v HMRC [2017] STC 926 at [115] that:

It is also apparent that the correction of a mistake by HMRC is not, on its own, sufficient to reach the necessary threshold of unfairness. As the Court of Appeal noted in Hely Hutchinson at [48], a decision-maker "is not bound, and is not entitled, to follow a previous decision that he considered erroneous".

In effect, the Tribunal must conduct a balancing exercise. In this context, the Supreme Court in Finucane referred at [56] with approval to the guidance given by the Court of Appeal in R v Northern East Devon Health Authority, ex parte Coughlan [2001] QB 213 at [57] that, "once the legitimacy of the expectation is established, the Court will have the task of weighing the requirements of fairness against any overriding interest relied upon for the change of policy".

Based on this, we accept Mr Simpson's submission that it is necessary for the Tribunal to consider the extent and nature of any detriment which may have been caused to Queenscourt as a result of its reliance on the ruling made by HMRC and weigh this in the balance in determining whether there is a sufficient element of unfairness that it would be wrong for HMRC to be able to depart from their ruling.

Although, as we have noted, detrimental reliance is not a requirement, Queenscourt does not suggest that there is anything else which would reach the required level of unfairness in order to enable a defence based on legitimate expectation to succeed other than the fact that Queenscourt has had to repay the VAT which it thought it had successfully reclaimed.

Given the comments of the Court of Appeal in MFK (see paragraph [195] above), the repayment of the tax wrongly refunded by HMRC cannot in our view on its own be sufficient to render it unfair for HMRC seek to correct their error. We therefore need to look at the alleged detriment to Queesncourt.

As we have mentioned, the detriment identified by Dr Patel is the fact that the Group had to pull out of deals to open a new Costa Coffee outlet and a new KFC outlet and also had to defer the refurbishment of two KFC stores.

The evidence relating to the extent of the detriment suffered by Queenscourt itself is however sketchy. This was not addressed by Queenscourt in its grounds of appeal nor by Dr Patel in his witness statement. The only evidence we have is Dr Patel's oral evidence at the hearing. We do not know for example whether any of the KFC outlets in question were operated (or in the case of the new outlet, was to be operated) by Queenscourt as opposed to other Group members. In addition, we do not know the extent of any actual financial cost or loss to Queenscourt as a result of these events.

In addition, it was unclear to what extent other circumstances such as Covid, increasing energy costs and increasing interest on borrowings (all of which were mentioned by Dr Patel as issues affecting the Group) impacted on the decisions which were made in relation to the projects which Dr Patel identified.

One thing we do know from Dr Patel's evidence is that the opening of a new KFC outlet costs around £600,000 and that the remodelling of a KFC store costs between £100,000-£200,000. The three KFC related projects Dr Patel referred to in his evidence would therefore have cost something close to £1 million in total. When compared with the recovery assessments relating to Queenscourt which totalled £75,000, it seems to us more likely than not that these projects must have been affected not only by HMRC's recovery assessments but by other factors impacting on the Group's cashflow as well.

Even if the recovery assessments relating to other group companies are also taken into account, the total is still only approximately £400,000 and so it again seems likely that other external factors impacting the Group's cashflow must also have been involved in the relevant decisions.

As we say, even if it were accepted that the cancellation or deferral of these projects resulted from HMRC's recovery assessments, there is little evidence as to the extent of any detriment. There is, for example, no evidence as to what return on its investment Queenscourt might have received if it had been able to open a new KFC outlet.

Similarly, although Dr Patel gave evidence that there was typically a 5%-7% increase in turnover following the remodelling of a KFC store, there was no evidence as to what the typical turnover for a store might be nor, indeed, what impact this might or might not have on the profitability of any given store.

There are two other factors which Queenscourt relies on in terms of detriment. The first relates to the deferral of the remodelling of the two KFC outlets. These should have been remodelled in 2022 but this was deferred until 2023. As we have explained, the franchise agreement with KFC requires stores to be remodelled on a regular basis. As we understand it, the requirement in relation to these outlets is that they are remodelled every five years. In relation to this, Dr Patel's evidence was that, although the remodelling only took place in 2023, as it should have occurred in 2022, the next remodelling will still have to take place in 2027.

However, we cannot see that this gives rise to any additional detriment over and above the impact of the deferral which we have considered above as, had the deferral not taken place, the outlets would have had to have been remodelled in 2027 in any event. There was certainly no evidence as to any specific detriment that might be caused.

The second point is also linked to the deferral of the remodelling of the two KFC outlets and the associated need for the franchise agreement with KFC in respect of those outlets to be renewed. Dr Patel's evidence is that, in order to get KFC to agree to the deferral of the remodelling of the stores and the renewal of the relevant franchise agreements, the Group had to agree that KFC would be able to grant a franchise to Welcome Break to open another KFC outlet in the same area as the Group was operating. The Group did however receive a rebate of £25,000 on its franchise fee in recognition of this.

Again, the problem is that we have no evidence as to the extent of any detriment which might be caused to Queenscourt (or the wider Group) as a result of this. Part of the reason for this is that the new Welcome Break franchise has not yet opened and so there is not yet any impact on Queenscourt or the wider Group.

However, in addition, we were provided with no evidence about the proposed Welcome Break franchise and the capacity for it to have an impact in the future on any outlets operated by the Group. We do not, for example, know how close it is to any outlet operated by the Group, whether it is in a motorway service station or on a high street or whether there is any likelihood that a customer who would previously have made a purchase from one of the Group's outlets might in the future make a purchase from the new Welcome Break franchise instead.

Our conclusion therefore is that, based on the evidence available to us, whilst Queenscourt may have suffered some detriment to its business as a result of having to repay the VAT which had been reclaimed, it has not shown that there has been, or is likely to be, any serious detriment to it which results solely or primarily from HMRC making the recovery assessments.

Against this must be balanced HMRC's duty to collect the right amount of tax. If HMRC's error were not corrected, Queenscourt would be put in a better position than other taxpayers in respect of whom HMRC had applied the law correctly. As noted above, the Court of Appeal in Samarkand considered that there was a strong public interest in ensuring that no individual taxpayer is unfairly advantaged at the expense of other taxpayers.

In addition, in our view, Queenscourt must also bear some responsibility for HMRC's mistake. On reviewing the error correction notice which led to HMRC accepting the first claim, it is apparent that, although this refers to over-declared output VAT on sales of zero rated products when sold as part of a meal deal, it does not refer in terms to the question as to whether the meal deal should be treated as a single standard rated supply or whether it could be treated as a multiple supply.

Whilst Queenscourt cannot be criticised for not doing HMRC's job for them, given the existence of HMRC guidance referring to the Domino's case where dips supplied with hot food were treated as part of a single standard rated supply which, given PWC's expertise, they would no doubt have been aware of, it is hard for Queenscourt to say that it is conspicuously unfair for HMRC to recognise its mistake and to apply the law correctly despite its original acceptance of the claim.

Overall, taking all these factors into account, we do not consider that any detriment which may have been suffered by Queenscourt is sufficient to enable us to say that HMRC's decision is so outrageously unfair that it should not be allowed to stand.

We should mention one additional point raised by Mr Simpson on behalf of HMRC. He suggests that, if HMRC cannot correct their mistake and make a recovery assessment, s 80(4A) VATA would have no purpose. However, we do not accept this. HMRC can always make a recovery assessment. They are only prevented from doing so if they have made a clear, unambiguous and unqualified statement in circumstances where it would be sufficiently unfair for them to depart from that statement. As in this case, there will no doubt be many other cases where that high threshold of unfairness is not reached.

As we have rejected Queenscourt's case based on legitimate expectation, we must now consider its alternative submissions based on estoppel. The type of estoppel relied on by Queenscourt is known as estoppel by convention.

The principles relevant to this were set out by the Supreme Court in Tinkler v HMRC [2021] UKSC 39 after an exhaustive review of the relevant authorities. The Supreme Court approved at [45] the principles set out by Briggs J (as he then was) in HMRC v Benchdollar Limited [2009] EWHC 1310 (Ch) at [52] subject to one refinement subsequently referred to by Briggs J in Stena Line Limited v Merchant Navy Ratings Pension Fund Trustees Limited [2010] EWHC 1805 (Ch) at [137] and by the Court of Appeal in Blindley Heath Investments Limited v Bass [2015] EWCA Civ 1023 at [92].

The relevant principles can be summarised as follows:

It should be noted that, in the Supreme Court, no question as to the jurisdiction of the Tribunal to consider arguments based on estoppel by convention were raised, despite the principle apparently being relied on by Mr Tinkler at all levels of his appeal. Similarly, the question of jurisdiction was not raised in Cattrell v HMRC [2024] UKFTT 67 (TC) , a subsequent case heard by the First-tier Tribunal which dealt with an argument based on estoppel by convention.

In this case, HMRC did not make any submissions to the effect that the Tribunal did not have jurisdiction to consider arguments based on estoppel by convention. We have not therefore considered this point in any detail although record that, bearing in mind the statutory framework which we have already discussed in the context of legitimate expectation, we do not see any obvious reason why the Tribunal would not have jurisdiction to consider arguments based on estoppel by convention in the context of an appeal against a recovery assessment, particularly given that this does not fall into the category of public law arguments.

Ms Brown submits that, as a result of the error correction notice and the subsequent acceptance by HMRC of the claim, the first four requirements set out above are satisfied as:

Mr Simpson's only response to this was to repeat the points which he had made as to why there was no clear, unambiguous and unqualified statement made by HMRC for the purposes of legitimate expectation. Given that we have rejected these points, we accept Ms Brown's submission that there was an expressly shared common assumption between Queenscourt and HMRC that the dip pots would be zero rated, that HMRC bore some responsibility for, and agreed to, the assumption and that Queenscourt relied on it.

The problem faced by Queenscourt, however, is the requirement that the reliance must have occurred "in connection with some subsequent mutual dealings between the parties" and that some detriment must "thereby" have been suffered by Queenscourt.

As we have said, the reliance identified by Ms Brown is the giving of the second error correction notice seeking a further repayment of VAT. However, the detriment which she relies on is the impact on the Group's business which we have already described in our discussion of the legitimate expectation arguments.

Based on Dr Patel's own evidence, the various elements of detriment which he describes resulted not from the refusal of the claims contained in the second error correction notice but from the making of the recovery assessments requiring repayment of the credits which HMRC had given in response to the first error correction notice.

Our conclusion therefore is that the final requirement for Queenscourt to be able to rely on estoppel by convention has not been satisfied. Although there was reliance on the common assumption in connection with subsequent mutual dealings between Queenscourt and HMRC, represented by the second error correction notice, no detriment has been shown to have been suffered by Queenscourt as a result of that reliance.

For the reasons we have explained, the appeal is dismissed.

The supply of dip pots as part of a takeaway meal deal is part of a single standard rated supply of the hot food and dips.

Whilst the Tribunal does have jurisdiction to consider arguments based on legitimate expectation in the context of an appeal under s 83(1)(t) VATA against a recovery assessment made under s 8A(4A) VATA, it is not in this case sufficiently unfair for HMRC to resile from their initial acceptance of the claim made in the first error correction notice and to apply the correct tax treatment.

HMRC are not estopped from making or relying on their recovery assessments as there has been no detrimental reliance on the original position taken by HMRC in connection with any subsequent mutual dealings.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to "Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)" which accompanies and forms part of this decision notice.