A property management agency has lost a case at the High Court over whether its supplies of accommodation should be treated as exempt from VAT.

The claimant, Realreed Limited, owned the freehold of Chelsea Cloisters, a block of over 600 flats, with 200 let as serviced apartments.

Realreed had accounted for VAT from 1992 until 2019 on the basis that its supplies of accommodation in the retained flats were exempt.

Following several years of apparently allowing the exempt status, in February 2019 HMRC informed Realreed that the transactions were taxable supplies of accommodation, rather than exempt.

Based on this decision, HMRC made assessments for unpaid VAT for £4,800,000 for the periods 02/15 to 01/19. Realreed lodged an appeal.

In addition to its appeal, Realreed brought judicial review proceedings to challenge the decision to raise assessments for VAT. It contended that, even if the supplies of the accommodation were subject to VAT, the decision was ‘unreasonable and conspicuously unfair’.

HMRC argued that the making of the assessments was a legitimate exercise in tax collection and that Realreed had ‘no legitimate expectation’ that the relevant supplies would be treated as exempt from VAT.

It denied that it was either unfair or an abuse of power to make the assessments and also said that substantive unfairness was not a ground for judicial review.

Realreed pointed to a history of VAT and tax inspections carried out by HMRC over a long period of time, none of which had questioned the VAT treatment of the flats. Since the business began in 1989, Realreed treated the lets as an exempt rental of property.

Their offices had been subject to inspections in 1992, 1993, 1995, 2005 and 2014 and HMRC never suggested that its VAT treatment of the flats was incorrect.

HMRC argued that it had not made any representation as to the correct VAT treatment which Realreed could rely on and submitted that they had not ‘put all its cards face up on the table’ and that there had been material changes to their business over the period covered.

The High Court reviewed the evidence of the HMRC visits over the period concerned, including notes made by HMRC officers.

It considered that these inspections were of limited significance, and contributed to HMRC’s understanding of the claimant’s business but they did not involve any representation that could be relied on by Realreed.

There was no evidence that they had asked for any assurance as to the correct VAT treatment of the disputed supplies and did not expressly state that they had considered whether the supplies were exempt.

Justice Lavender said: “The claimant’s case is that HMRC should have told it that the relevant supplies were not exempt. Its evidence is that the only thing which would have made them change its behaviour would have been HMRC saying that the relevant supplies were subject to VAT. Even then, they said that they would not have agreed with such a statement but would have acted on it.

“Had it been told, the claimant would have either spoken to HMRC and identified a way of adjusting its business so that the relevant supplies were exempt from HMRC or would have charged VAT to its customers.

“On the negative proposition that HMRC did not say that the relevant supplies were subject to VAT, the courts should not use the jurisprudence of legitimate expectation to reverse the burden created by the VAT Act. It is for the taxpayer to determine the correct treatment of its supplies.

“As a general rule, the fact that HMRC does not challenge the taxpayer’s treatment of a particular supply on a particular occasion or occasions is not to be treated as shifting the burden from the taxpayer to HMRC.”

The appeal was dismissed.

Commenting on the case, RSM said: “The company has brought separate legal proceedings against HMRC in the High Court concerning HMRC’s failure to raise this as an issue in the 11 VAT inspections it had conducted on the two companies over the years.

“Not only had HMRC never questioned the exemption, but it had also even raised small assessments in the past on related VAT issues that were based on the assumption that the rentals were exempt from VAT.

“Overall, the company felt that HMRC’s conduct gave it a ‘legitimate expectation’ that its position had been correct, which would mean that HMRC could only apply VAT to its property lettings prospectively.”