Appeal a VAT assessment and you must pay the tax first. Appeal an income tax assessment and you need not. Totel challenged that asymmetry under EU law and lost, so the prepayment rule stands, and the hardship application under s84(3B) is the only way round it.
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Full name: Totel Ltd v Commissioners for Her Majesty’s Revenue and Customs
Citation: [2018] UKSC 44; [2018] 1 WLR 4053
Court: Supreme Court
Judgment: 26 July 2018 (unanimous)
Subject: The pay or deposit rule for VAT appeals under s84 VATA 1994; the EU law principle of equivalence
Result: Totel’s appeal dismissed. The prepayment rule survives.
Why This Case Matters
A taxpayer who wants to appeal a VAT assessment must first pay or deposit the tax. A taxpayer who wants to appeal an income tax or corporation tax assessment does not. That difference has an obvious consequence: a business with a cash flow problem can be shut out of the tribunal on VAT while retaining a full right of appeal on direct tax.
Totel challenged that asymmetry as a matter of EU law. It lost, and the rule stands. For practitioners the case matters less for its EU law reasoning than for what it confirms: the prepayment requirement is a real barrier, and the hardship application is the only way round it.
The Statutory Framework
- s84(3) VATA 1994: the tribunal shall not entertain an appeal against an assessment unless the amount which HMRC has determined to be payable has been paid or deposited.
- s84(3B) VATA 1994: the requirement does not apply where HMRC is satisfied, or the tribunal decides, that requiring payment or deposit would cause the appellant to suffer hardship. The application is made to HMRC first; if HMRC refuses, the tribunal decides.
- No equivalent for direct taxes. Income tax, capital gains tax and corporation tax appeals proceed without prepayment, subject only to the separate question of whether the tax is postponed under s55 TMA 1970.
The Facts and the Argument
Totel was assessed to VAT and wished to appeal. It contended that the prepayment rule was unlawful because it infringed the EU law principle of equivalence.
The principle of equivalence requires that procedural rules governing claims founded on EU law must not be less favourable than those governing similar domestic claims. VAT is derived from EU law; income tax, corporation tax and stamp duty land tax are purely domestic. Totel’s argument was therefore straightforward: a taxpayer asserting an EU-derived right has to pay first, while a taxpayer asserting a comparable domestic right does not, and that is discrimination against the EU law claim.
The Ratio Decidendi
Why VAT is different
The reasoning turns on the character of VAT as a transaction tax collected by the trader. A VAT-registered business collects tax from its customers and holds it on account for the Exchequer. It is not, in the ordinary case, paying its own money. A trader who has charged VAT and not accounted for it is in a materially different position from an individual or company disputing a liability computed on its own profits.
There are also structural differences in the assessment and collection machinery, in the frequency of returns, and in the repayment position, which the Court treated as relevant to the comparison.
Obiter and What the Case Does Not Do
- It does not say the rule is fair. The Court decided a question of EU law compatibility, not one of policy. Criticism of the rule as a barrier to access to justice is unaffected by the decision.
- It does not address the hardship provision. The Court’s reasoning proceeds on the footing that s84(3B) exists, and the existence of a hardship escape is part of what makes the rule tolerable, but the judgment gives no guidance on how hardship should be assessed.
- The post-Brexit position. The decision was reached by reference to EU law principles which then applied. Their continued operation in relation to VAT and excise is governed by the assimilated law framework. In practice the domestic rule in s84(3) is unaffected either way.
- Excise and other indirect taxes have their own comparable provisions, and the analysis in Totel is not automatically transferable to them.
Making a Hardship Application
This is where the practical work is, and it is routinely done badly or too late.
The test
Whether requiring the appellant to pay or deposit the disputed amount would cause it to suffer hardship. It is a forward-looking question about the effect of payment on the appellant, not about the merits of the appeal and not about whether the appellant deserves relief.
What to put in
- Current management accounts and the latest filed accounts.
- Bank statements and facility letters, including any headroom on facilities and any covenants.
- A cash flow forecast showing the effect of the payment on the business over the following months.
- Aged debtors and creditors, and evidence of committed liabilities such as payroll, rent and finance.
- Evidence that funds cannot be raised: refusals from lenders, absence of realisable assets, unavailability of shareholder support.
- For an individual or small company, personal guarantees and any evidence about the consequences of failure.
If HMRC refuses
The tribunal decides the question. It is a discrete application, usually determined on the papers or at a short hearing, and it is separate from the substantive appeal. A refusal does not end the appeal if the money can be found; it simply means the tribunal will not entertain it until the amount is paid or deposited.
Practitioner Application
- Identify the prepayment problem at the first meeting. On any VAT assessment of significance, the first question is whether the client can pay or deposit, and if not, what the hardship evidence looks like.
- Run hardship in parallel with the appeal, not after it.
- Consider a Time to Pay arrangement alongside, which addresses collection while the appeal proceeds and demonstrates engagement.
- Do not confuse prepayment with postponement. For direct taxes the equivalent step is a postponement application under s55 TMA 1970. The two regimes are different and the deadlines are different: see our guide to the statutory review and appeals ladder.
- Remember interest runs regardless. Paying or depositing the disputed amount stops interest on that sum. Where some liability is accepted, paying that element on account is usually worthwhile even if hardship is granted on the balance.
- Where the assessment itself is defective (out of time, not to best judgment on the Van Boeckel principles, or improperly notified) those points do not remove the prepayment requirement, but they strengthen the hardship application by showing the appeal is not speculative.
Frequently Asked Questions
Do I have to pay the VAT before I can appeal?
Yes, unless hardship applies. Section 84(3) VATA 1994 provides that the tribunal shall not entertain an appeal against a VAT assessment unless the amount determined has been paid or deposited. The exception in s84(3B) applies where HMRC is satisfied, or the tribunal decides, that requiring payment would cause the appellant to suffer hardship. There is no equivalent requirement for income tax, capital gains tax or corporation tax appeals.
Why is VAT treated differently from income tax?
The Supreme Court in Totel held that a trader appealing a VAT assessment is in a significantly different position from a taxpayer appealing a direct tax assessment. VAT is a transaction tax collected by the trader from customers and held on account for the Exchequer, rather than a charge computed on the taxpayer’s own profits. On that basis the direct taxes were not true comparators for the purposes of the EU principle of equivalence.
How do I apply for hardship?
To HMRC first, at the same time as lodging the appeal, and if HMRC refuses, to the tribunal. It is an evidential exercise, not an argument. Provide management accounts, bank statements and facility letters, a cash flow forecast showing the effect of payment, aged debtors and creditors, committed liabilities, and evidence that funds cannot be raised elsewhere. Figures and documents, not adjectives.
Does the strength of my appeal affect hardship?
Not directly. The statutory question is whether requiring payment would cause the appellant to suffer hardship (a forward-looking question about the effect on the business, not about the merits. Showing that the appeal is not speculative) for example that the assessment is out of time, was not made to best judgment, or was improperly notified, does no harm and helps frame the application.
Is prepayment the same as postponement for direct taxes?
No, and they should not be confused. For VAT the disputed amount must actually be paid or deposited before the tribunal will hear the appeal. For direct taxes the equivalent step is an application to postpone the tax under s55 TMA 1970, which defers collection while the appeal proceeds. Different regimes, different deadlines, different consequences, and interest runs in both cases.