The King (on the application of Hotelbeds UK Limited) and Commissioners for His Majesty’s Revenue and Customs [2025] EWHC 2312 (Admin)
Introduction
On the face of it, this case concerns a procedural question – namely, whether HMRC must follow their public written guidance. In this instance, that guidance related to the administrative requirements for recovering input tax. The judgment touches, however, on much broader concerns. It provides insight into when judicial review is appropriate (and can succeed), the principles that govern a supplier’s right to deduct input tax, and how parties should approach contradictory or ambiguous HMRC guidance.
Background
The taxpayer, Hotelbeds, is a wholesale buyer and reseller of hotel rooms. Acting as principal, it paid VAT on the purchase of hotel rooms, and was entitled to recover VAT on the resale of those rooms to its customers.
Under Regulation 29 of the VAT Regulations, the right to deduct will be given effect automatically when a valid invoice is held. Regulation 29 also gives HMRC discretion to accept other evidence of the charge to VAT in effecting the right to deduct.
In relation to a significant amount of input tax, Hotelbeds did not hold valid invoices. Despite this, it submitted two Error Correction Notices (ECNs) claiming input tax in relation to a series of supplies. In relation to those two ECNs, HMRC applied their discretion under Regulation 29 and accepted alternative evidence for the right to deduct.
Subsequently, Hotelbeds submitted two further ECNs (ECN3 and ECN4), claiming the right to deduct in relation to two later periods. At the same time, it communicated to HMRC that due to the difficulty in obtaining valid invoices, it had adopted the Tour Operators’ Margin Scheme (TOMS) in relation to its supplies from 1 March 2023 (such that there was no longer a need for recovery against invoices).
HMRC notified Hotelbeds that it would not accept ECN3 and ECN4, denying Hotelbeds the right to deduct input tax in relation to those later supplies. In HMRC’s view, and pointing to wording used in its guidance, Hotelbeds had “systematically failed to obtain valid VAT invoices”, which was fatal to its claim to deduct input tax. This was despite the taxpayer seeking invoices from 900 separate VAT registered suppliers in respect of 300,000 individual supplies.
Hotelbeds applied for judicial review on several grounds:
- The refusal to allow the deductions was unlawful, because HMRC failed “without good reason” to apply their own guidance.
- Hotelbeds had a legitimate expectation that HMRC would accept the claims in ECN3 and ECN4, on the basis of:
- statements in HMRC’s guidance; and
- HMRC’s acceptance of the earlier ECNs.
- HMRC had made an irrational decision, given that they held sufficient other proof of the relevant supplies being made.
- HMRC had breached the EU principle of effectiveness in relation to periods before 31 December 2020.
Decision
The court allowed Hotelbeds’ application for judicial review, finding HMRC’s decision not to allow the right to deduct in relation to the supplies which were the subject of ECN3 and ECN4 to be unlawful. In addition, in relation to periods before 31 December 2020, there was a breach of the EU principle of effectiveness.
In relation to various pieces of HMRC’s guidance, on which both the taxpayer and HMRC relied for their respective arguments, the court came to the “clear conclusion” that none of those were drafted to address situations where there were no invoices, rather than invalid or defective invoices. In addition, the guidance – to the extent it could be of assistance in relation to the facts – was “inconsistent, ambiguous” and “difficult to navigate”. As such, there was no written policy which enabled HMRC to decline to consider other evidence demonstrating the right to deduct.
On that basis, the court turned to the scope of the discretion in Regulation 29. This required balancing several factors, including on the one hand the protection of the revenue, the minimisation of fraud, and the efficient management of tax, and on the other, the neutrality of VAT, the central importance of the right to deduct, and a proportionate/reasonable approach to procedural requirements.
The court set out that invoices are the essential documents by which HMRC correctly identifies VAT amounts and reduces the risk of fraud. However, here, there was no risk of fraud: the taxpayer had communicated to HMRC the steps it had taken to secure invoices, HMRC were satisfied by other materials in relation to the two earlier ECNs, and, crucially, when continued efforts to obtain invoices proved inadequate, Hotelbeds instead adopted TOMS, such that there was no threat to the future system of input tax deduction.
In addition, since HMRC had been sufficiently satisfied with the evidence Hotelbeds had previously provided to deduct input tax in the first two ECNs, it was Hotelbeds’ reasonable expectation that HMRC would treat ECN3 and ECN4 in the same way. Not to do so was inconsistent with the payment of the earlier ECNs.
As such, the refusal to allow the deduction of input tax in relation to ECN3 and ECN4 was unfair and unreasonable, and unsustainable in public law terms.
Comment
The case provides helpful clarity in using alternative recourse, beyond the tax tribunal, to hold HMRC to account. In particular, taxpayers should consider carefully, bearing in mind short and strict limitation periods for judicial review, how they might protect or defend their positions.
The case not only highlights HMRC’s fallibility when interpreting revenue policy; it also indicates that, where HMRC’s guidance is unclear or contradictory, parties should consider the legal principles governing the relevant tax (in this case, input tax) and any course of dealing.
It is of note that the judgment was not predicated on legitimate expectation, perhaps due to the inconsistency in HMRC’s guidance. The court considered it preferable to consider the public law unreasonableness of HMRC’s approach, discretion and policy application on the facts.
Taxpayers may wish to consider, based on their own facts, if this judgment assists with submitting ECNs where VAT invoices may not be available or are invalid. This judgment may also be relevant in instances where HMRC ‘s failure to comply with its accepted practice is unlawful on public law grounds.
