A trader appealing a VAT assessment must generally pay or deposit the disputed tax first unless hardship is shown, unlike a taxpayer appealing an assessment to income tax, capital gains tax or stamp duty land tax. Totel Ltd argued that this difference breached the EU principle of equivalence. The Supreme Court dismissed the appeal because those other tax appeals were not true comparators.
Section 84 of the Value Added Tax Act 1994 requires a trader who wishes to appeal a VAT assessment first to pay or deposit the tax notified, unless the trader can show that doing so would cause hardship. Otherwise the appeal will not be entertained. The same pay-first condition applies to appeals against assessments to insurance premium tax, landfill tax, climate change levy and aggregates levy. It does not apply to appeals against assessments to income tax, capital gains tax, corporation tax or stamp duty land tax.
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At the time of the appeal, VAT was governed by EU law. Totel sought to challenge several assessments but could not establish hardship. It relied on the EU principle of equivalence, comparing its position with appellants contesting income tax, capital gains tax or stamp duty land tax.
The Court of Appeal rejected that challenge. It held that those domestic taxes were not true comparators and that, even if they were, other domestic taxes imposed the same pay-first requirement, so the no most favourable treatment proviso prevented a breach. Totel challenged both conclusions. HMRC argued for the first time that, viewed in the round, the pay-first requirement did not make the VAT procedure less favourable.
The search for a true comparator
Equivalence operates alongside effectiveness. Effectiveness invalidates a national procedure that makes enforcement of an EU right virtually impossible or excessively difficult. Equivalence is comparative and cannot operate at all unless there is a true comparator among procedures for domestic claims. The national court decides that question because it is best placed to assess its own procedures.
The comparison is context-specific and must focus on the purpose and essential characteristics of the claims, including the particular procedural difference alleged to be less favourable. Member states may apply different procedures to different claims where the procedural differences are attributable to, or connected with, differences in the underlying claims. Addressing similarity at the very high level of all claims against the state, or all tax appeals, is not enough.
Lord Briggs, with whom Lady Hale, Lord Sumption, Lord Carnwath and Lord Hodge agreed, rejected both extremes. Totel’s submission that every appeal against a tax assessment was a true comparator, because such appeals share a general purpose and go to the same tribunal, was too general. HMRC’s submission that a VAT claim can never have a true comparator in any other tax was also wider than the context-specific enquiry required. European authority justified considerable caution, particularly when comparing VAT with direct tax, but did not establish that VAT is invariably sui generis for every purpose of equivalence.
On the facts of this procedural comparison, income tax, capital gains tax and stamp duty land tax were not true comparators. Subject to limited exceptions, the economic burden of VAT falls on the ultimate consumer, while the trader collects it and accounts for it to HMRC. A person appealing an assessment to one of those other taxes is being asked to pay, from their own resources, a tax whose burden falls on them and which they have not collected from anyone else. The pay-first requirement is logically connected with that difference, so it was appropriate for VAT even without evidence of why the requirement was originally imposed.
Totel’s objections did not remove the distinction. Cross-border acquisition and import liabilities exist to make the VAT scheme work as a whole and do not displace the paradigm of the collecting trader. Some appeals concern supplies on which no VAT was charged, but the more typical dispute concerns deduction of input tax. PAYE has an element of similarity, yet the employee remains liable if the employer wilfully fails to deduct, HMRC’s recourse for VAT is only against the trader, the employer does not receive a charged fund for which it is accountable, and PAYE is only a subset of income tax. Totel had not contended that PAYE alone was the comparator.
The absence of a true comparator was sufficient to dispose of the appeal.
Less favourable treatment and the proviso
Had a true comparator without a pay-first rule existed, Lord Briggs would have treated the VAT requirement as less favourable. Pending appeals against income tax, capital gains tax and stamp duty land tax, HMRC may still seek collection, including by winding-up petition, unless postponement is obtained on the statutory grounds. Those principles also apply to VAT, and a trader who has shown hardship may in practice avoid enforcement. Even so, the tests differ, and pay-first is additional to the collection regime: a trader who cannot show hardship must lodge the tax before appealing, whereas the other taxpayer may appeal and may or may not face collection.
The CJEU’s no most favourable treatment proviso means that equivalence does not require an EU claim to receive the most favourable treatment given to any comparable domestic claim. Its practical meaning did not have to be finally decided. Lord Briggs tentatively considered that an EU procedure must be broadly as favourable as the procedure for truly comparable domestic claims, rather than the very best available, and that the purpose is to prevent discrimination against claims because of their EU origin. On that view, the Court of Appeal was broadly correct that a member state may apply rules already applied to similar claims, provided the EU claim is not singled out for the worst treatment or subjected to an exceptionally tough regime particular to one domestic claim. Because no true comparator had been shown, the proviso did not arise and no reference to the CJEU was necessary.
Verdict: The Court unanimously dismissed Totel’s appeal. It had shown no sufficiently comparable domestic procedure to establish unequal treatment of its VAT claim. No final ruling on the most-favourable-treatment proviso was necessary.
Source: Totel Ltd v Commissioners for Her Majesty’s Revenue and Customs [2018] UKSC 44
