Landmark VAT Ruling Should Shift HMRC Reply On Guidance

This article originally appeared in Law360, October 2025. 

On Sept. 9, the High Court handed down a landmark decision in the case of R (on the application of Hotelbeds U.K. Ltd.) v. Revenue and Customs Commissioners.

The case involved a challenge by Hotelbeds against HM Revenue & Customs' refusal to allow input tax recovery without valid value-added tax, or VAT, invoices.

Although the one-line description of the matter does not appear to be particularly noteworthy, the main argument that ultimately won the case for Hotelbeds, namely that HMRC was bound by their own guidance, is.

As odd as it may sound, HMRC's previous stock response to taxpayer allegations that HMRC had failed to comply with its own published guidance was to state that the guidance was not law and therefore HMRC was not obliged to follow it.

However, by way of its decision in Hotelbeds, the High Court has now confirmed that the principles on public authorities complying with their own policy apply to HMRC and oblige it to comply with its published guidance.

Further, HMRC's published guidance constitutes policy documentation for these purposes.

This result is a significant win for taxpayers and should make HMRC reconsider its approach to defending allegations that it has failed to apply its own published guidance.

Although it is rare to see a taxpayer succeed in an application for judicial review, the decision should remind taxpayers that judicial reviews can be successful if properly pleaded in the correct circumstances, and should be considered as part of a tax litigation strategy.

Background

Hotelbeds was established in 1974 and was a wholesale supplier of hotel rooms. Hotelbeds operated by purchasing hotel accommodation from U.K. VAT registered hotels and selling it to other suppliers of hotel accommodation, for example, U.K. tour operators, events companies or other entities in their corporate group, for onward distribution.

Hotelbeds acted as principal at the material time and therefore paid VAT on the purchase of hotel rooms. It would then recover that VAT, as it was incurred for the purposes of an onward supply, i.e., the sale of the rooms to other suppliers of hotel accommodation.

Hotelbeds encountered difficulties in obtaining valid VAT invoices from its suppliers for several reasons and therefore struggled to recover all the input tax paid. However, on June 10, 2019, Hotelbeds submitted an error correction notice, or ECN, seeking recovery of the input tax it had been unable to recover as a result of not having a valid VAT invoice during the period from Jan. 1, 2017, to March 31, 2019 — ECN1.

In support of ECN1, Hotelbeds relied on Regulation 29 of the VAT Regulations 1995, which gives HMRC a discretion to accept a claim for input tax recovery if a taxpayer holds other evidence of the charge to VAT. HMRC repaid the amount claimed under ECN1 on March 23, 2020, after checking and confirming the position.

Hotelbeds submitted a further ECN on April 7, 2020, for the period, ECN 2, which was approved by HMRC on May 11, 2020.

Two further ECNs were submitted on the same basis as ECN 1 and ECN 2. The third ECN was submitted on Sept. 3, 2021, for VAT periods March 2020 to June 2021 — ECN 3 — and the fourth ECN was submitted on Jan. 25, 2023, for VAT periods July 2021 to November 2022 — ECN 4.

HMRC rejected ECN 3 and ECN 4 and relied on its guidance in VAT Notice 700, stating that the "guidance is clear that where a business has systematically failed to obtain a valid VAT invoice, HMRC will not consider exercising its discretion."

Further, HMRC advised that it had considered whether to exercise its discretion under Regulation 29, and decided that it was not appropriate to do so where no invoice was obtained and there was no apparent reason one could not be obtained.

Hotelbeds filed a claim for judicial review on the basis that ECN 3 and ECN 4 ought to be paid, as they were based on the same evidence and arguments as ECN 1 and ECN 2.

Legal Arguments

Hotelbeds' primary ground for judicial review was that HMRC is obliged to comply with its published guidance, namely VIT31200 from HMRC's Manual, VAT Notice 700 and VAT Strategy: Input Tax Deduction without a Valid VAT invoice — Statement of Practice March 2007, unless there was good reason to depart from it.

Hotelbeds also alleged that:

• HMRC had breached a legitimate expectation;
• HMRC acted irrationally in making a different decision on ECN3 and ECN4; and
• HMRC's decision breached the European Union principle of effectiveness — it was open to Hotelbeds to rely upon that principle in respect of periods prior to Dec. 31, 2020.

In response, HMRC argued that Hotelbeds had "systematically failed" to obtain valid VAT invoices and that Regulation 29 was intended to address defective invoices, not situations where no invoice existed at all. HMRC also cited concerns about fraud and revenue protection, suggesting that allowing the claims would set a dangerous precedent.

The Decision

The High Court found that in refusing ECN3 and ECN4, HMRC had misconstrued and/or misapplied its own policy, and it allowed the claim on this basis, as well as on the basis of unreasonableness. The court also said that HMRC probably breached the EU law principle of effectiveness for the periods in which the principle applied.

In summary, the High Court explained that the principles that determined this application were as follows.

• A person has a right to the determination of his application in accordance with policy.
• The executive may adopt any policy, provided that the adopted policy is a lawful exercise of the discretion conferred by the statute, and a decision-maker must follow their policy unless there is a good reason to depart from it.
• The meaning of policy is a question of interpretation, and the starting point is to look at the natural and ordinary meaning of the words used, viewed in their particular context and in light of common sense.
• A document for public guidance should be seen through the eyes of the reasonable reader who should be assumed to start by taking it at face value.

It should be noted that, as the High Court held in favor of Hotelbeds on the primary argument, it did not determine the legitimate expectation argument.

Comment

The High Court's decision in Hotelbeds will have wide ramifications, and will make HMRC rethink its usual stock response to claims that it has not acted in accordance with its published guidance.

In addition, it should remind taxpayers that properly pleaded judicial reviews in the correct circumstances can be successful and should also be considered as part of a litigation strategy, particularly given the limited jurisdiction of the First-tier Tribunal.

Further, given the specific issues in the Hotelbeds case, i.e., when input tax can be recovered without a valid VAT invoice, businesses that have previously made a conscious decision not to recover input tax on the basis that they did not hold a valid VAT invoice should revisit their evidence of the transactions and consider submitting an ECN.