Finding the Natural Balance: public law arguments and disclosure in the FTT

Recent developments in case law mean there has been an increased appetite to pursue public law arguments before the First-tier Tribunal (FTT), rather than by means of a traditional application for judicial review. 

While HMRC continue to challenge the FTT’s jurisdiction, for now, the trend is for the FTT to agree to hear many of these arguments. There is, however, a question as to how disclosure applies when a public law argument is made before the FTT because the disclosure that is required in a tax appeal is more limited than the duty of candour that applies in a judicial review. This subject has been touched on in a recent FTT appeal, Natural Balance Foods Limited v HMRC [2025] UKFTT 01555 (TC), with the FTT finding that the duty of candour also applies in a tax appeal with public law arguments. This is a helpful finding for taxpayers because, although HMRC may suggest that they apply a duty of candour in all tax appeals, in practice they are more forthcoming in the judicial review context. 

Judicial review vs tax appeal 

As a public body, HMRC must make decisions rationally and in a procedurally fair manner that is within the scope of its powers. If taxpayers consider HMRC have not done so, they have the ability to challenge decisions through a claim for judicial review. At that point, HMRC will be subject to a duty of candour with the result that they will be required to disclose (and set out fully and fairly) all matters that are relevant to the decision that is under challenge, or are otherwise relevant to any issue arising in the proceedings. This can mean that the taxpayer is provided with materially relevant information in relation to HMRC’s decision-making that could support the taxpayer’s case. 

However, there is a question whether public law arguments can be heard in the FTT. This is because the FTT is a creature of statute and has no inherent public law jurisdiction. As such, if a taxpayer is pursuing an appeal against a decision relating to a substantive tax matter (which is most frequently when any public law issues will arise), whether the FTT can consider public law arguments will depend on the statutory context of the appeal. This means that a taxpayer can often be left in the unsatisfactory position of having to file two sets of proceedings: an appeal to the FTT in respect of the substantive tax issue and a judicial review claim in respect of their public law arguments. 

Even if both proceedings can be heard by the FTT, while it would generally be preferable for the taxpayer to be able to bring all their arguments in the FTT at the same time, there is a question as to whether HMRC would be as forthcoming with relevant information outside of a judicial review. In a typical tax appeal, with no public law arguments, HMRC are only required to disclose those documents on which they intend to rely. There has not been much need to consider how disclosure should operate when the FTT is determining public law issues that would otherwise be the subject of judicial review because, historically, the FTT has been wary of interpreting legislation in a manner that provides them with the necessary jurisdiction. In general, such arguments have been limited to provisions that expressly state the FTT has jurisdiction to consider public law arguments, such as when the FTT has to determine if HMRC’s decision as to whether to reduce a penalty in light of special circumstances is “flawed when considered in the light of the principles applicable in proceedings for judicial review”. There have, however, been recent developments in this area that bring this issue into focus, and there is currently significant dispute as to the correct statutory construction (and, therefore, the FTT’s jurisdiction) with regard to appeals under s 83 of the Value Added Tax Act 1994 (VAT Act) and, in particular, s 83(p) of the VAT Act. 

KSM Henryk Zeman and subsequent cases

In KSM Henryk Zeman Sp Z.o.o. v HMRC [2021] UKUT 182 the Upper Tribunal determined that the FTT had jurisdiction to hear a legitimate expectation argument where the appeal was made under s 83(p) of the VAT Act 1994. More generally, it was said in Zeman that the “critical question… is whether the relevant statutory scheme expressly or by implication excludes the ability to raise a public law defence of legitimate expectation.”

Since Zeman, there have been an increasing number of VAT appeals before the FTT seeking to raise public law arguments. HMRC’s position in these appeals has been consistent – they do not consider that Zeman is binding on the FTT, on the grounds that the UT’s finding was either obiter dicta (i.e. the finding was not part of the best or preferred justification for the conclusion reached) or per incuriam (i.e. relevant legal authorities were not considered). 

The FTT has taken different positions on whether Zeman is binding, with the difficulty stemming from the manner in which the UT reached its decision. Rather than first considering if the FTT had jurisdiction to hear a legitimate expectation argument, the UT first determined that there would not be a legitimate expectation and then went on to find that the FTT had jurisdiction to hear the argument. Subsequent FTTs, such as that in Treasures of Brazil Limited v HMRC [2024] UKFTT 929 (TC), have held that the jurisdiction finding is binding on them as it was “a constituent part of the decision made” while others, such as the FTT that heard the recent case of WM Morrison Supermarkets Ltd v HMRC [2025] UKFTT 1542 (TC), have found that, although determining jurisdiction is a logically necessary first step before considering if there is a legitimate expectation, it was not treated by the Judge as a necessary first step and so was not part of the ratio of the decision (after considering comments from the Court of Appeal on determining the ratio in R (oao Youngsam) v Parole Board [2019] EWCA Civ 229). However, even in cases where the FTT has not determined it is bound, it has decided to follow Zeman (sometimes on the basis that it is the correct decision and, as in the case of WM Morrison Supermarkets Ltd, on the basis that it is not “plainly wrong”).

In short, there is significant confusion, but the trend is to give the FTT jurisdiction to hear public law arguments in this context.

Natural Balance Foods Limited

Given that, for now, the FTT seems inclined to hear these public law arguments, what does it mean for disclosure? The recent case of Natural Balance Foods Limited v HMRC [2025] UKFTT 01555 (TC) concerned an application for specific disclosure in circumstances where one of the taxpayer’s grounds of appeal was that they had a legitimate expectation that they would be taxed in accordance with HMRC’s public policy on the taxation of flapjacks – a public law argument that would, prior to Zeman, probably have been made only by way of judicial review. As has become standard, HMRC maintained that the FTT did not have the jurisdiction to hear the legitimate expectation argument, but they had not applied to strike the argument out. 

Broadly, applications for specific disclosure can be made in the FTT where the applicant considers there is material the other party is likely to have, and it is necessary to deal with the case justly. The first category of documents sought by Natural Balance Foods Limited were the documents concerning the changes to HMRC’s policy, including any notes of discussions, policy advice, drafts, impact reports, consultations, or correspondence to the extent they existed. In a judicial review, HMRC should be voluntarily disclosing this information pursuant to their duty of candour, but they had not done so as part of the FTT disclosure, leading to the application for specific disclosure. In the application, the taxpayer submitted that HMRC’s duty of candour was invoked.

The FTT found that the category of documentation sought was necessary for determination of the appeal and stated that: “In so doing I do not consider that the Appellant is achieving disclosure which it should properly have applied for within the judicial review proceedings. The public law arguments advanced and countered are live in this appeal. On that basis I am also of the view that HMRC's public law duty of candour applies (to the extent that such duty is wider than the duty which should generally apply in all proceedings in which a public authority is a party including this Tribunal).”

The FTT’s reference to the duty of candour applying in all proceedings stems from case law which suggests that “it is long-established practice that HMRC usually accept that the duty applies to them in normal tax appeals.” However, despite the fact that HMRC may say that they accept they are always subject to a duty of candour, it does not appear to be something they are regularly putting into practice (and they did not in this case). A taxpayer is much more likely to receive relevant information from HMRC once they have made a claim for judicial review. As such, the FTT’s confirmation in Natural Balance Foods Limited that the public law duty of candour applies where there are public law arguments (as it would in a judicial review) is helpful for taxpayers. It is also useful that the FTT found it applied regardless of the fact that HMRC had not accepted their jurisdiction.

Where to from here?  

It remains to be seen how the ongoing dispute as to the FTT’s jurisdiction is going to develop. Although HMRC clearly want public law arguments to be restricted to the jurisdiction of the High Court as much as possible, the FTT appears to be embracing the wider jurisdiction that results from the Upper Tribunal’s statutory interpretation in Zeman. While it may be disappointing for taxpayers that HMRC are so opposed to raising public law arguments in the FTT (where there is a technical tax argument on the same facts), that opposition is presumably because HMRC value the requirement on the taxpayer to obtain permission and to do so within strict time limits. It may well be that, in the future, we see the higher courts take this view as well, and the FTT is less able to hear public law arguments. However, in the meantime, it is helpful for taxpayers that, if they decide to raise a public law argument in the FTT, which the FTT agrees to hear, Natural Balance Foods Limited puts them in a good position to obtain relevant evidence from HMRC.