Mandatory online VAT filing: breach of taxpayers' human rights

The First-tier Tribunal has found that the human rights of appellants who were elderly, disabled and computer illiterate were breached by HM Revenue & Customs’ requirement that they file their VAT returns online. It is unusual for human rights issues to determine the results of a tax case. But this decision is a useful reminder that such issues can be relevant even, in certain circumstances, to businesses.

Leyla Cooper, Norton Rose Fulbright LLP

The First-tier Tribunal has found that the human rights of appellants who were elderly, disabled and computer illiterate were breached by HM Revenue & Customs' (HMRC) requirement that they file their VAT returns online (L H Bishop Electrical Co Ltd A F Sheldon t/a Aztec Distributors v HMRC [2013] UKFTT 522).

It is unusual for human rights issues to determine the results of a tax case. But this decision is a useful reminder that such issues can be relevant even, in certain circumstances, to businesses.

The filing requirement

Regulation 25A of the VAT Regulations 1995 (SI 1995/2518) (1995 Regulations) required compulsory online VAT filing for all newly registered businesses and those businesses with a turnover of over £100,000 with effect from 1 April 2010, and for all businesses with effect from April 2012 (the online requirement).

Exemptions were only given to persons whose religion prevented them from using electronic communications and to those who were subject to specified insolvency procedures. There were no exemptions for those who found online filing difficult, for any reason. A system of telephone filing was also introduced allowing the taxpayer to orally state the figures on their VAT return to an HMRC officer, although no information on telephone filing was publicly available.

Test cases

Approximately 100 taxpayers appealed against notices from HMRC requiring them to file their VAT returns online, three of whom (the appellants) were selected as test cases. Two of them were computer illiterate, and one was computer literate, but because of his disabilities was unable to read a computer screen without distortion or use Sa keyboard or mouse.

The appellants argued that the online requirement was wrong in law and breached their human rights and EU law rights.

A question of jurisdiction

Whether, and to what extent, the tribunal has public law jurisdiction are questions that have increasingly been the subject of debate in the tribunal and Upper Tribunal.

HMRC's initial position was that the tribunal had no jurisdiction to consider the cases under public law or the European Convention on Human Rights (the Convention), and that the appellants' only recourse was judicial review or the European Court of Human Rights (ECHR). However, if the Convention was applicable, HMRC argued that the telephone filing option meant that the appellants' human rights were not affected.

The tribunal concluded that it had no jurisdiction to adjudicate on whether HMRC had unlawfully failed to exercise a discretion that it possesses. However, the tribunal found that Parliament intended it to have jurisdiction over the application of tertiary legislation (where HMRC publishes rules under legislation), extra-statutory concessions and contract and special methods entered into by HMRC, but not over more general questions of legitimate expectation. This finding was important in determining the legality of the telephone filing concession that HMRC used to defend the case.

As regards its jurisdiction to consider the Convention, the tribunal held that, under the Human Rights Act 1998, it has jurisdiction to consider whether the online requirement was unlawful, as secondary legislation may be disapplied or struck down by any court or tribunal to the extent that it is incompatible with an appellant's human rights.

The tribunal decision

The tribunal held that HMRC had sought to "have their cake and eat it" by arguing that the telephone concession was not justiciable by the tribunal, but that HMRC could nonetheless rely on it as a defence. The tribunal found that HMRC had acted as no reasonable tax authority could have acted: it intentionally failed to publicise the telephone filing option, and for those that did find out about it, it granted the concession without checking that they were entitled to it.

Although HMRC had power to exempt a person from the online requirement, that power did not allow HMRC to offer a filing system that was neither online nor paper. The telephone filing option was beyond HMRC's powers and was not lawful.

Having found that HMRC could not rely on the telephone filing option, the tribunal then considered whether the remaining methods available to the appellants for complying with the online requirement (that is, buying a computer, using a public library computer, asking friends to file the returns, or paying an agent to file the returns) involved a breach of the appellants' human rights.

The tribunal cited ECHR case law as authority that companies can have human rights if the company concerned is the alter ego of its owner, and that a company can be a victim of discrimination if the discrimination against it is based on a characteristic possessed by its owner or director. However, it is not clear how far this extends, as the tribunal did not consider whether other types of companies (that are not the alter egos of their owners) could have human rights.

The tribunal held that Article 1 of the First Protocol of the Convention (the right to peaceful enjoyment of possessions) was breached by the suggestion that the appellants buy a computer in order to submit their VAT returns. However, while the 1995 Regulations could be justified as it was entirely reasonable for HMRC to seek to reduce the costs of tax collection, the failure to make exemptions for the elderly and disabled amounted to unjustifiable indirect discrimination contrary to Article 14 (the right not to be discriminated against).

It also held that requiring the appellants to borrow a computer, or asking friends or relatives to make the VAT returns for them was of sufficient gravity that it could not be justified, and so breached Article 8 (the right to respect for private and family life). Requiring the appellants to use a public library or an agent also engaged Article 8, and in conjunction with the fact that it breached Article 14, amounted to indirect indiscrimination against the elderly, disabled and those living in remote areas. All of the ways in which the appellants could have complied with the online requirement therefore constituted a breach of human rights.

The tribunal also held that the appellants' rights under EU law were affected. Although the online requirement had a legitimate aim of reducing HMRC's costs, the measures taken were not appropriate to the legitimate aim. The measures were also disproportionate because it would have been easy to include the elderly, disabled and those living in remote areas in the exemption already made for other persons.

A fourth appellant's case, objecting to the online requirement due to security concerns, was dismissed. The tribunal held that the Convention does not give a right for persons to be guaranteed risk-free communications, and so Article 8 was not breached.

An unusual case

This is an unusual and interesting example of human rights featuring prominently in a tax case. The well-reasoned and detailed judgment reflects the fact that this is an important test case, and is one where the tribunal seems to be putting down a marker to HMRC regarding its conduct.

The consideration of the cases on the public law jurisdiction of the tribunal are particularly helpful in drawing together the various threads that emerge from those sometimes conflicting cases.

Although, in this case, it was HMRC that sought to rely on the telephone filing concession, it is usually the taxpayer who relies on a concession and this decision should serve as a reminder to companies of the fragile basis of HMRC concessions, as they are instances where taxpayers receive a reduction in tax liability to which they would not be entitled under the strict letter of the law.

Leyla Cooper is an associate at Norton Rose Fulbright LLP.

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