It has become increasingly difficult for taxpayers to obtain permission to apply for judicial review, let alone be successful in their claim. At the same time, the need to seek judicial review has grown given the complexity of the tax rules that are applied by reference to HMRC guidance and practice. In the last five years, of the applications (with HMRC as the defendants) that have made it to permission stage, the percentage that have been successful as compared with the previous five years, has halved from approximately 31% to 16% (with just over half of applications not actually making it to permission stage).

What the statistics demonstrate, however, is not that judicial review is a pointless remedy, but that success requires ensuring that the specific conditions are met. The large number of withdrawals may also suggest that an application for judicial review is an effective way of encouraging HMRC to review their decisions. 

The taxpayer’s recent success in R (on the application of Hotelbeds UK Limited) v HMRC [2025] EWHC 2312 (Admin) is a good example of why judicial review can still be an avenue worth pursuing, if a resolution cannot be reached with HMRC. The decision under review in the case was HMRC’s refusal to accept Hotelbeds UK Limited’s (Hotelbeds) error correction notices (the ECNs) seeking recovery of input tax. The Administrative Court ultimately found this to be unreasonable (in a public law sense) and, therefore, unlawful. 

The facts

Hotelbeds has a business supplying hotel rooms – it purchases hotel accommodation from UK VAT registered hotels and sells the accommodation to other suppliers for onwards distribution. As a principal, Hotelbeds pays VAT on the purchase of the hotel rooms, but it is able to recover that VAT as it is incurred for the purpose of its onwards supplies on which VAT is accounted for. 

Unfortunately, in practice, Hotelbeds encountered difficulty recovering all of the input tax paid as, for many transactions, it did not hold an invoice. Hotelbeds explained that this was a consequence of using a virtual credit card for payment because payment took place when a hotel guest checked in or out of the hotel and not when a VAT invoice was issued. That is not to say Hotelbeds simply accepted that no VAT invoice would be issued; the evidence was that 900 separate suppliers were chased in respect of 300,000 individual supplies, and between May 2017 and October 2017 Hotelbeds had sent over 5,000 emails and made over 800 calls to request valid invoices (which the suppliers were legally obliged to provide).

Although Hotelbeds was unable to obtain all the invoices, that was not the end of the matter. The absence of an invoice is not fatal to the ability to recover VAT as Regulation 29 of the VAT Regulations 1995 gives HMRC a discretion to direct that a taxpayer hold other evidence of the charge to VAT. HMRC have published three different policy documents related to this discretion, and Hotelbeds maintained that they relied on those documents when presenting HMRC with an ECN on 10 June 2019 that sought recovery of the input tax for the period from 1 January 2017 to 31 March 2019 (ECN1). HMRC carried out checks and then approved the claim on 23 March 2020. Although HMRC noted at this time that they “had some serious concerns about the process going forward” and that Hotelbeds “should have the correct processes in place” to “ensure invoices were obtained and held”, they approved a second ECN (ECN2) with no further comment on 11 May 2020. 

HMRC took a different approach to the ECNs submitted on the same basis for the periods 1 March 2020 to 30 June 2021 and 1 July 2021 to 30 November 2022. The ECNs were refused on 10 May 2023, and HMRC relied on their guidance in “VAT Notice 700”, saying 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.” HMRC then went on to say that, nonetheless, they had considered whether to exercise their discretion and did not think it was appropriate where no invoice was held and there was no apparent reason why Hotelbeds could not obtain it. Further, HMRC noted the scale of the issue (it had persisted for seven years with claims of over £22m) and pointed out the concerns that had already been raised, and the fact that Hotelbeds was still interacting with the suppliers. 

The arguments

Hotelbeds challenged HMRC’s decision to refuse to accept the ECNs on multiple grounds. They argued:

• the decision was unlawful as HMRC failed to apply, without good reason, their own guidance;
• they had a legitimate expectation that HMRC would accept the ECNs given the statements in their guidance and the previous acceptance of ECN1 and ECN2;
• the decision was irrational given that there was sufficient proof of the supplies, HMRC were applying their guidance inconsistently, and the refusal grounds were incoherent; and
• there was a breach of the EU principle of effectiveness for periods before 31 December 2020. 

The guidance that Hotelbeds primarily relied on was VIT31200, which stated that “Where claims to deduct VAT are not supported by a valid VAT invoice HMRC staff will consider whether or not there is satisfactory alternative evidence of the taxable supply available to support deduction.” The guidance went on to list example factors that could be considered when exercising the discretion, which were taken from the Invalid Invoice Statement of Practice that Hotelbeds also relied on. Hotelbeds maintained that HMRC had wrongly refused to consider exercising their discretion where there was no invoice held rather than an invalid invoice. With respect to the third piece of guidance, VAT Notice 700, which HMRC referred to in their decision, Hotelbeds argued that they had not “systematically” failed to obtain a valid VAT invoice as they had tried to comply with the legislation, and HMRC could not rely on this to refuse to consider exercising their discretion. 

The decision

Although Hotelbeds based their arguments on HMRC’s published guidance, the Court came to the “clear conclusion” that none of the guidance was drafted to deal directly with a situation where no invoice was held. It was found that the drafters had in mind the position where an invalid invoice was held. In addition, it was noted that the guidance “even if indirectly perhaps of assistance, is inconsistent, ambiguous and, in my judgement, difficult for a decision-maker to navigate” and that “In lighting upon the written policy contained in Notice 700 HMRC has misconstrued and/or misapplied its own policy.”

The Court found that, in the absence of any directly applicable policy, the decision-maker should have gone back to the scope of the discretion and judged the request made against the principles of the tax in light of HMRC’s duty to protect the revenue. It was found that “The strong driver against recovery without a valid invoice is fraud” and that the purpose of the discretion was to recognise that VAT neutrality is important i.e. the retention by HMRC of moneys properly recoverable is wrong and unfair. On the facts, there was no real risk of fraud and HMRC failed to take the principles of neutrality and the right to deduct properly into account. 

The Court also looked at the meaning of the word “systematically” and held that it meant a threat to the recovery of VAT emerging from a planned system and that the threat to the revenue going forward was of paramount importance. It was, therefore, found that irrespective of HMRC’s misapplication of the guidance and failure to consider the relevant principles, the fact that HMRC knew that Hotelbeds had changed its system for the future was “fatal” to HMRC’s decision. 

In reaching its conclusion, the Court accepted all the grounds raised by Hotelbeds, except for legitimate expectation, which it determined was unnecessary to consider. However, the Court did note that: 

“… the obstacles concerning documentation and proof placed in the way of recovery of ECNs 3 and 4 were not reasonable….. In light of the payment of ECNs 1 and 2 without serious quibble as to the quality of the evidence or the bona fides of the suppliers and the supply, the Claimant could reasonably expect that evidence of that nature was sufficient to found recovery.”

And:

“In other words the taxpayer was entitled to believe that the policy had been and did apply to it.”

Reliance on HMRC guidance

It is important for taxpayers to keep in mind that HMRC guidance is not law or even quasi-law; it is HMRC’s view and is intended to help the public to understand the tax legislation and HMRC’s application of it, and to assist HMRC officers in their administration of the tax system. While this means it is possible for a taxpayer to take a position contrary to HMRC’s guidance (albeit with the knowledge HMRC are likely to challenge it), it also means that when pursuing an appeal in the Tax Tribunal as to how tax rules should be applied, it is not usually possible to argue that HMRC improperly failed to apply, or resiled from, their guidance. Generally, such arguments relate to HMRC practice and can only be made by way of judicial review.

This was what happened in the present case, where it was ultimately found that HMRC’s guidance was inapplicable, inconsistent and ambiguous. However, while the Court was able to come to the “clear conclusion” that that the guidance was not directly applicable, both Hotelbeds and HMRC acted on the belief that some of the guidance did apply (with a disagreement as to how it applied).This highlights difficulties that can arise with respect to HMRC’s guidance, when each party may read into the words what they consider the “fair” position to be, and emphasises the caution that taxpayers need to exercise when relying on HMRC’s guidance.

To mitigate that risk, taxpayers should carefully consider the situation any guidance is aimed at and ascertain whether their facts fall within it. They should look out for any uncertainties or caveats within the guidance or, as it is expressed in the case law, ensure that the guidance is “clear, unambiguous and devoid of relevant qualification”.

In an ideal world, you would hope that in a matter like this, where there is no suggestion of fraud and no risk of the same situation arising in the future, an agreement could be reached with HMRC without having to resort to litigation. However, Hotelbeds attempted ADR prior to the decision being issued, and were unable to resolve the matter. In fact, despite the Pre-Action Protocol for Judicial Review requiring the parties to consider ADR, HMRC will generally refuse applications for ADR at this point, forcing the matter to be determined by the Courts. In such circumstances, where there is no other way of challenging HMRC’s decision-making, it is very encouraging to see that judicial review has allowed HMRC’s approach to be carefully scrutinised by the Court, and that HMRC have been held to account for improperly fettering their discretion.