Totel Ltd v Revenue and Customs [2018] UKSC 44

Totel Ltd challenged the VAT 'pay-first' appeal requirement as breaching the EU principle of equivalence, arguing other tax appeals lacked such a condition. The Supreme Court dismissed the appeal, holding that Income Tax, CGT and SDLT were not true comparators with VAT.

Facts

Under section 84 of the Value Added Tax Act 1994, traders wishing to appeal assessments to VAT must first pay or deposit the disputed tax with HMRC, unless they can demonstrate hardship. This ‘pay-first’ requirement applies to certain other taxes (Insurance Premium Tax, Landfill Tax, Climate Change Levy, Aggregates Levy) but not to Income Tax, Capital Gains Tax (CGT), Corporation Tax or Stamp Duty Land Tax (SDLT).

Totel Ltd sought to appeal several VAT assessments but could not establish hardship. It contended that the pay-first requirement infringed the EU law principle of equivalence, on the basis that appeals against assessments to Income Tax, CGT and SDLT were similar domestic claims that did not face this condition. The Court of Appeal had rejected the challenge on two grounds: (i) the proposed domestic taxes were not true comparators; and (ii) even if they were, the ‘no most favourable treatment proviso’ applied because other domestic taxes were treated identically to VAT.

Issues

The Supreme Court considered:

• Whether appeals against assessments to Income Tax, CGT and SDLT were true comparators with VAT appeals for the purposes of the principle of equivalence.
• Whether the pay-first requirement amounted to less favourable treatment of VAT appellants.
• The proper interpretation and application of the ‘no most favourable treatment proviso’.

Arguments

Appellant (Totel)

Mr Firth submitted that all UK appeals against tax assessments shared the same general purpose and were heard by the same tribunal, making them true comparators at a sufficiently general level. He relied on CJEU authorities including Transportes Urbanos for a broad approach to comparability. He contended that the discovery of any comparable domestic claim treated more favourably than the EU claim would offend the principle of equivalence, unless the better treatment was exceptional within Lord Neuberger’s formulation in Stringer.

Respondent (HMRC)

Mr Swift QC submitted that VAT was sui generis with no true comparator among other taxes, relying on Reemtsma and Marks & Spencer. He further argued, for the first time before the Supreme Court, that viewed in the round the VAT regime was not less favourable, given that Income Tax, CGT and SDLT could still be enforced pending appeal absent postponement. On the proviso, he argued that the principle of equivalence is satisfied if any true domestic comparator is treated no more favourably than the EU claim.

Judgment

Lord Briggs (with whom Lady Hale, Lord Sumption, Lord Carnwath and Lord Hodge agreed) dismissed the appeal.

True comparators

The court emphasised that the comparator analysis is context-specific, focusing on the purpose and essential characteristics of the allegedly similar claims, and on the specific procedural provision said to constitute less favourable treatment. The court declined to accept HMRC’s broader submission that VAT could never have a true comparator in another tax, but held that on the present facts, none of Income Tax, CGT or SDLT was a true comparator.

The crucial difference is that VAT is paradigmatically collected by the trader from the ultimate consumer and accounted for to HMRC, whereas Income Tax, CGT and SDLT are borne by the taxpayer from their own resources. It is therefore appropriate that traders, absent hardship, should pay or deposit tax they have already collected. The court rejected Totel’s submissions that acquisition/import VAT, supplies on which no VAT had been charged, or PAYE undermined this paradigm. PAYE was distinguished because the employee remains liable in cases of wilful failure to deduct, no fund is created from charges to employees, and PAYE is only a sub-set of the wider Income Tax scheme.

Less favourable treatment

Although unnecessary to decide, the court indicated that the pay-first requirement does, in principle, amount to less favourable treatment. The collection and postponement regimes for Income Tax, CGT and SDLT are not equivalent substitutes; the pay-first requirement is additional to such mechanisms, and a trader unable to demonstrate hardship must pay up front before any appeal can proceed.

The Proviso

The court offered tentative observations only. The proviso is not a free-standing rule but part of the principle of equivalence itself, requiring that the EU procedure be broadly as favourable as that for truly comparable domestic claims, not the very best available. Its purpose is to prevent discrimination against EU-based claims. The Court of Appeal’s approach—that a member state may apply any available set of rules already applied to similar claims, provided EU-derived claims are not singled out for the worst treatment—was broadly correct, subject to the qualification that exceptionally tough rules particular to a given claim could not be borrowed to justify harsh treatment of an EU claim.

Implications

The decision confirms that the principle of equivalence requires a context-specific comparator analysis, focusing on the purpose and essential characteristics of the claims and the specific procedural rule challenged. It establishes that, for the purpose of testing the VAT pay-first requirement, direct taxes such as Income Tax, CGT and SDLT are not true comparators, owing to the structural distinction between a VAT trader’s role as collector of tax and the position of taxpayers bearing direct taxes themselves.

The judgment leaves open the possibility that, in other contexts, claims relating to VAT may be comparable with claims relating to other taxes—rejecting any blanket rule that VAT is sui generis for all equivalence purposes. The court’s observations on the ‘no most favourable treatment proviso’ are tentative and obiter, reflecting that the issue might in another case warrant a reference to the CJEU. Practitioners should note that the comparator exercise is highly fact-sensitive, and that a procedural difference will not necessarily constitute less favourable treatment when the differing rule is logically connected to underlying differences between the claims. The decision is significant for tax practitioners challenging assessments and for the broader analysis of EU-derived procedural rights in domestic litigation.

Verdict: Appeal dismissed. The Supreme Court held that Income Tax, CGT and SDLT were not true comparators with VAT for the purposes of the EU principle of equivalence, and the pay-first requirement under section 84 of the Value Added Tax Act 1994 therefore did not infringe that principle.

Source: Totel Ltd v Revenue and Customs [2018] UKSC 44