Update: VAT and trade waste collections
So I hear that the trade waste liability is being appealed again?
Well, not exactly. The Durham Company, trading as Max Recycling, has successfully applied for a judicial review (JR) of HMRC’s decision to treat as non-business trade or commercial waste collections by local authorities.
Like I said, it’s being appealed again?
No, a JR is not an appeal against a liability decision – that must be done under VAT legislation in the tribunals and higher courts. A JR is a challenge to the way in which a decision has been made, not the outcome of the decision.
There are three grounds upon which the courts in a JR will quash a decision:
- Illegality. This happens if HMRC has failed to understand correctly the law that regulates its decision-making power.
- Procedural impropriety. Here, a decision is quashed if HMRC failed to comply with an express procedural requirement or a procedural requirement that is implied by the rules of natural justice.
- Irrationality. If HMRC has reached a decision that is so unreasonable that no reasonable body could reach it, it can be quashed by JR.
So what will this JR achieve?
It will examine whether HMRC followed the correct approach in arriving at its decision. It cannot substitute an alternative decision. The judgment will be that the correct approach was followed – HMRC will be vindicated – or that it wasn’t, in which case HMRC will need to go through the process again.
So even if Max Recycling win the liability might not change?
That’s right. HMRC might make the same decision again, so long as it does so in a lawful way. However, it is likely that if Max Recycling were to win, the court would give implicit directions as to how a decision ought to have been made.
Why is Max Recycling bringing the case?
The company claims that non-business treatment is anti-competitive, and gives local authorities a commercial advantage over private waste businesses offering the same type of service. They say that they and other private waste companies have lost income as customers have sought out the VAT-free alternative that local authorities can offer.
Are local authorities concerned?
The Local Government Association has said that a change from non-business to standard rated treatment would result in a loss of income to Councils of between £34 million and £77 million, based on the 2013/14 figures. So, yes, it is a concern
Are HMRC involved in this?
We understand that HMRC had pressed for the action to be heard in the Upper Tribunal as a different type of challenge, one that would determine the VAT liability. They likely see the JR as an unwelcome distraction and are unconcerned what the final outcome is. But, they’d prefer the Court to uphold their original decision making processes.
So what happens now?
We understand that HMRC have sought a preliminary ruling on how they reached their decision that there was a ‘special legal regime’. There are two tests that must be passed before a local authority’s activities can be treated as non-business, the first being that they are carried out under a special legal regime.
The second test is whether, where there is a special legal regime, non-business treatment would cause a ‘significant distortion of competition’. The decision making by HMRC on this second test would be reviewed following the preliminary ruling.
The case was heard in the Upper Tribunal on the 18/19 July 2016 and judgment can take up to three months to be delivered.
PSTAX will update clients with developments as they occur.