This week the First-tier Tribunal begins hearing the taxpayer's appeal in Omaze UK Ltd v HMRC. At its heart lies a deceptively simple question: are paid entries into prize draws that also offer a free entry route exempt from VAT as participation in a lottery, or are they standard-rated supplies?

Until February this year, when HMRC's position was clarified in response to a Parliamentary question, many would have been unaware that this issue even existed. Yet the answer is far from obvious. The dispute turns on the meaning of an undefined statutory concept, the extent of the interaction (if any) between VAT legislation and gambling legislation and broader principles of statutory interpretation. There are respectable and finely balanced arguments on both sides.  

Against that backdrop, HMRC has recently written to prize draw operators across the sector. The letters inform recipients that prize draw tickets are taxable supplies for VAT purposes and remind businesses that they may be required to register for VAT where their taxable turnover exceeds the registration threshold.

We will eventually find out whether that conclusion is correct when the Tribunal delivers its judgment. 

Whatever the outcome, however, the case provides an opportunity to consider a broader question. Tax disputes frequently arise because legislation is unclear or capable of supporting more than one interpretation. Where that is so, how should HMRC communicate with taxpayers when encouraging them to adopt HMRC's preferred view? 

Opposing Points of View 

HMRC is plainly entitled to form a view about how legislation should be interpreted and to challenge taxpayers. Equally, HMRC recognises that taxpayers do not have to accept its interpretation and may validly hold alternative views where the law is unclear or finely balanced. 

The question is how HMRC should present that view when the issue remains unresolved and taxpayers may be unaware that competing interpretations exist? 

The recent nudge letters do not explain the technical basis underpinning HMRC's conclusion. They do not acknowledge that there are contrary views held within the industry and by experienced advisers. Nor do they refer to the current litigation and impending Tribunal hearing. They simply proceed on the basis that prize draw tickets are taxable supplies for VAT purposes and direct businesses accordingly. 

Many recipients, particularly those without in-house tax capabilities or specialist advisers, will inevitably read such a letter as indicating that the legal position is clear. 

Yet the reality is that the issue is currently before the Tribunal precisely because it is not. 

How Should Taxpayers Approach Uncertainty? 

The position becomes particularly interesting when considered in the context of HMRC's wider expectations of taxpayers. 

The VAT system is founded upon self-assessment. Taxpayers are expected to determine their own liabilities by reference to the legislation rather than simply accepting assertions made by others. 

Indeed, where legislation is uncertain, HMRC would ordinarily expect taxpayers to undertake a balanced assessment of competing arguments before deciding upon an appropriate filing position. HMRC's guidance on uncertain tax treatments proceeds on precisely that basis. Taxpayers are expected to identify alternative interpretations, assess their respective merits, reach a reasoned conclusion and, where appropriate, explain that conclusion to HMRC. 

That expectation is entirely proper. However, it does raise an obvious question. How is a taxpayer supposed to undertake that balancing exercise when the communication received from HMRC neither explains HMRC's reasoning nor acknowledges that alternative analyses exist? 

Role Reversal 

It is illuminating to reverse the roles. 

• Suppose a professional adviser wrote to operators across the sector stating unequivocally that prize draw entries were exempt from VAT. 

• Suppose the adviser made no reference to HMRC's published position. 

• Suppose the adviser failed to mention the Tribunal hearing due to commence within days. 

• Suppose the adviser omitted any discussion of the arguments supporting the contrary view. 

Many would regard that communication as incomplete. Most advisers would regard it as incumbent upon them to explain not only their preferred analysis but also the existence of the competing view.  

Should similar standards apply when HMRC communicates with taxpayers? 

That is ultimately a question about the standards of transparency, balance and trust that should underpin the tax system. 

Have you received a nudge letter? If you have questions about an uncertain VAT position or HMRC correspondence, contact us.