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England and Wales High Court (Administrative Court) Decisions |
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You are here: BAILII >> Databases >> England and Wales High Court (Administrative Court) Decisions >> Airline Placement Ltd, R (On the Application Of) v Commissioners for His Majesty's Revenue and Customs [2023] EWHC 1191 (Admin) (19 May 2023) URL: http://www.bailii.org/ew/cases/EWHC/Admin/2023/1191.html Cite as: [2023] EWHC 1191 (Admin) |
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KING'S BENCH DIVISION
ADMINISTRATIVE COURT
Strand, London, WC2A 2LL |
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B e f o r e :
____________________
THE KING on the application of AIRLINE PLACEMENT LIMITED | Claimants |
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- and - |
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THE COMMISSIONERS FOR HIS MAJESTY'S REVENUE AND CUSTOMS | Defendants |
____________________
Howard Watkinson and Ishaani Shrivastava (instructed by HMRC) for the Defendants
Hearing dates: 10-11 May 2023
____________________
Crown Copyright ©
Mr Justice Constable:
Introduction
Factual Background
'It is usual for airlines to tie in newly qualified pilots for a minimum period, so that the airlines can recoup the costs that they have incurred in training the pilots. Consequently, the new product also aims to place the entire financial risk of pilots prematurely leaving their contracts of employment with the employee. This should be achieved by the proposed loan arrangements as illustrated in the appendices.'
(1) The receipt by the JV of supplies of subcontracted aviation training and aviation training from the parties to the JV;
(2) The provision of 'training product' by the proposed JV to the 'Recruitment Company';
(3) The grant of a loan to the trainee by a bank. The loan is made to the trainee and is a professional development loan with repayments not commencing until six months following completion of training;
(4) The trainee granting a loan to the Recruitment Company;
(5) A fee for providing the pool pilot (to the Recruitment Company) for completion of final stage training;
(6) The Recruitment Company repaying the loan from the trainee in full;
(7) The granting of the loan by the trainee to the airline, which becomes repayable over a period of time following the trainee's training. At the same time the trainee enters into a separate agreement that entitles the airline to compensation should the trainee fail to complete a minimum term of employment, and that this compensation should be equal to and set off against the outstanding loan repayments;
(8) Repayment of the loan to the bank over a period of minimum employment. 'This may be by way of 'salary sacrifice"; and
(9) Repayment of the loan to the bank over a period of time.
'Based on my understanding of the situation the joint venture will be receiving supplies from the two parties and providing onward supply of training to the airline industry within the United Kingdom'
'the bond is returned to the pilot upon completion of training. It is then passed on to the airline as 'security' for continued employment, and the airline repays is to the pilot over an agreed period of time'.
'During their employment with the partner airline, the cadet may receive a reduced salary to take account of the fact that the partner airline has paid a placement fee to APL for the provision of the cadet. However, these arrangements are made between the sponsor airline and the cadet without APL being party to the agreement.'
'The deposit of a bond by the cadet with APL is consideration for a supply of training made by APL[ .]they may argue that the only supply is one made of training and that this is made to the cadet. This would have a two fold impact. Firstly, APL would have to account for VAT much earlier than it currently does, and secondly the pricing of the Wings programme will be affected from the perspective of the cadet as a result of the irrecoverable VAT it will suffer.'
'For a ruling to be binding, HMRC must be in possession of the complete facts and context of the issues of uncertainty. Therefore the following information needs to be provided:
A clear explanation of the points that require HMRC's guidance;
The reason for uncertainty;
A brief indication of alternative tax treatments that have been considered;
[ ]
Copies of any other documents APL considers to be relevant [sic] to the issue in question
[ ]
Details of any related transactions or contracts.'
'During their employment with the sponsor airline, the cadet may receive a reduced salary to take account of the fact that the sponsor airline has paid a placement fee to APL for the provision of the cadet. However, these arrangements are made between the sponsor airline and the cadet without APL being party to the agreement.'
The first of these two sentences is repeated in a later part of the same draft.
'Andrew we would like to remove this paragraph as it might indicate that the Cadet is paying for the training they received from CTC by way of taking a reduced salary once employed and therefore in effect the Cadet is paying for their training.'
'During 2002, McAlpine Aviation Training ('MAT') and CTC Aviation Group plc were contemplating setting up a joint venture to run what is today known as the Wings Programme. In anticipation of the introduction of the Wings programme, in August 2002, MAT sought and obtained a ruling from HMRC on the VAT treatment of the Wings programme. Subsequent to receiving that ruling from HMRC, in May 2004 CAG bought MAT out of its share of the business and progressed with the Wings programme of its own accord.
CTC requests clearance regarding the VAT treatment of :
(1) The retention of security bonds deposited by cadets with APL on joining the Wings Programme; and
(2) The amounts of security bonds forfeited by cadets as compensation to APL as a result of early termination.'
'[ ]when Cadets join the Wings Programme they must each deposit a security bond of £60,000 with APL. This bond acts as security during the training programme in the event that the Cadet does not complete the training or chooses not to be placed into employment with a sponsor airline. Following an initial instalment of £5,400, the balance of the security bond is deposited in equal instalments over a period of 13 months.
Following completion of the training programme and upon employment of the Cadet by a sponsor airline, APL transfers the security bond, at the Cadet's direction, to the Cadet's sponsor airline. This is repaid to the Cadet over an agreed period of time by the sponsor airline and is intended to discourage the Cadet from seeking employment elsewhere, thus enabling the sponsor airline to benefit from their investment in having paid the placement fee. The airline then pays a placement fee of £60,000 plus UK VAT to APL for the provision of the fully trained Cadet.'
'Under the Wings Programme, the deposit of a security bond by the Cadet with APL should not be treated as a supply for VAT purposes, on the basis that APL earns its fees from (and hence provides services to) the sponsor airline and not the Cadet. In facilitating its training, APL is sponsoring the Cadet.'
'Sponsorship
We operate an innovative financing solution designed to make the programme open to applications from all walks of life, ensuring that talented individuals don't fall through the net.
We and your partner airline will sponsor your training and associated costs. You will, however, be required to deposit a training bond as security, but it's not payment for training. We initially hold the bond, which is then passed to the airline when you start work. The airline will then return the bond to you over a defined period, providing you remain employed with that airline[ ].
On employment, you will normally be paid a cadet entry salary. In addition, you will receive a monthly repayment of the training bond'
'How much does the Foundation Course cost?
This is the only part of the training that you are required to pay for. The current cost of the Foundation Course is [£7,000]
[ ]
When do I start earning a salary? How much will that be?
[ ]
Each airline has its own terms and conditions applicable to pilot employment. If you are pre-selected by an airline and enter the programme as a pre-selected cadet pilot, you will normally be paid a cadet entry salary for the first seven years of employment with month repayments of your bond to you for the same period. Obviously pay rates are up to the individual airline and set by market expectations and conditions. Basic starting salaries for newly qualified pilots in their first airline job are generally around £18,000 - £25,000[ ] Each airline may have slightly different terms and conditions applying to pre-selected CTC Wings Cadet pilots and you should refer to their websites for full details.'
[ ]
Who pays interest on my loan?
If you borrow money to provide the bond, you are liable to repay the loan and interest, normally with repayments deferred until you are employed. As a cadet pilot, during employment the airline will repay your bond on a monthly basis to enable you to make repayments on your bank loan.
[ ]
How much would it cost me to train to be airline pilot through a 'traditional' route?
You would need to find £60,000 or more, just for basic training. If you took out a loan, arranged your own training, and were able to find employment which would allow you to repay your loan at £600 per month, it would take about 14 years to repay the loan. You would need to dedicate about £150,000 of your future salary before tax to pay for your basic training. That's assuming all goes well.. In this unique programme, your future employer will sponsor the majority of your training (excluding the Foundation Course). The package provided for you is comprehensive and covers the unexpected. The total value of the programme exceeds £100,000[ ]'
'Deloittes refer to a previous ruling given to MAT. I cannot trace this ruling as MAT (811 8582 29) does not appear to have been VAT registered at the time the ruling was supposedly given. This VRN is now redundant.'
'[ ] please would you supply the following additional information:
1. You refer to a ruling given to McAlpine Aviation Training in 2002 in respect of the Cadets training programme but I can find no record of this. It would be helpful to see a copy of any relevant correspondence and documentation.
'
'Prior to visit informed that there was an on going query concerning the 'bonds' lodged with the company from the students. In brief the issue is that the company is maintaining the initial receipt of the £60,000 bond (received over a period of time ) is a security deposit in case the student terminates the course prematurely or opts to not be employed in a sponsor airline. In both cases either the full amount or a portion of the bond is kept by APL as a form of compensation and thus argued as outside the scope of Vat.
The company have been operating this system from inception of this company and prior to this company through Airline recruitment limited.
[ ]
The issue of bonds is elaborated on further with emails and correspondence and I deliberately avoided to [sic] much in depth discussion on the subject [other] than to outline (see letter) that a variation has occurred recently when 6 pilots were given a temporary placement which necessitated the issuing of a sales invoice from APL[ ]
[ ]
Interesting to note on the bond scenario is that Monarch airlines offered placement cadets a choice of lower salary and refund of the bond or higher salary and no refund. Mr Steele maintained that all 9 cadets involved took up the first option. I commented that if the second had been chosen this may have a significant impact on the treatment of the bonds.'
'[ ] Definition of consideration and the indicators listed in 7.3 would seem to apply: without the payments from the trainee APL will not supply the training package and there is a contract in place.
[ ]
Despite what is stated in the contract, we must consider what is actually happening (reference Reed Personnel STC 588). If the monies paid are funding the training as it progresses, then when any monies are retained by APL this is not as outside the scope compensation because a taxable supply has been made.
[ ]
The costs are reimbursed to the pilot in the position of employee but over a period of time but conditions apply and there is the possibility that not all of the bond will be repaid. This would indicate that money will be retained to cover costs already incurred for training and therefore a supply has been made.
Please also see audit report on EF dated 30/3/09.'
'It is made clear from the start in the Programme brochure that the payment made by cadets is not payment for training[ ]
Another incentive for cadets is the prospect of getting the cost of training back which happens which all CTC cadets can expect if they go through the programme and accept placement.
[...]
APL will sponsor and procure training and provide placement and pass the bond paid by cadets to sponsor airlines to be repaid to the cadets through salary over an agreed period. APL, which essentially seems to act as an employment agency, makes its money by placing trained individuals with airlines for which it charges a fee of £60,000[ ]Under this business model APL receives only one fee i.e. the placement fee paid by the airline; it has no entitlement to retain the bond paid by 'placed' cadets but is obliged by its agreement with a cadet to pass this to the airline which in turns pays it back to the cadet through salary. APL requires a bond because, one assumes, it's providing (or paying for) very expensive training and its means of recouping the cost of that and making a profit is by placing a cadet with an airline and charging the airline a fee for that placement.
The bond, and in particular the prospect of being repaid it through salary seems to me to be the incentive for the cadet to stay with APL. A cadet could obtain training anywhere presumably but the advantage with APL is the probability of getting the cost of training back as well as a placement with an airline.'
The conclusion then stated:
'This is not a straightforward case frankly I have wavered between one view and another. However, on balance, I think the payment of the 'bond' by successful cadets is not consideration for any supply by APL to cadets.'
'We have been given no documentation concerning, or explanation of, APL's relationship with 'sponsor' airlines this is relevant as we are told that APL passes the bonds over to these airlines, that APL is paid an amount equivalent to the bond by these airlines and because APL do not, as far as we see, guarantee to place a cadet with an airline.'
'the [Security Bond] is transferred to the sponsor airline employing the newly-qualified pilot on completion of training and is then refunded by that airline to the pilot over the course of their employment. In effect the airline is covering the training costs'
'Once the Cadet has completed the programme and is placed into employment with an airline which has entered into an agreement with APL (a Sponsor Airline) for the provision of trained pilots, the security bond is returned to the Cadet. The Cadet then passes this security bond to the Sponsor Airline they have been placed with and this is repaid to the Cadet in instalments via the Airline over a defined period of time.'
Legitimate expectations: the Law
(1) A legitimate expectation arises in circumstances where:
(a) the claimant has an expectation of being treated in a particular way favourable to the claimant by the defendant public authority;
(b) the authority has caused the claimant to have that expectation by words or conduct;
(c) the claimant's expectation is legitimate; and
(d) it would be an unjust exercise of power for the authority to frustrate the claimant's expectation.
See R (on the application of GSTS Pathology LLP) and others v. HMRC [2013] STC 2017 ("GSTS") at [72]-[73].
(2) Whether HMRC have created an expectation is to be objectively assessed and does not depend upon their intention: see R v. Barking and Dagenham LBC ex parte Lloyd [2001] LGR 86 at [31]-[35] and R (oao Vacation Rentals (UK) Limited) v. HMRC [2019] STC 251 at [60]-[62].
(3) For a legitimate expectation to arise in relation to an HMRC non-statutory clearance:
(a) the communication from HMRC should be clear, unambiguous and devoid of relevant qualification: see R v. IRC ex parte MFK Underwriting Agents Limited [1990] 1 WLR 1545 at p.1569G.
(b) the taxpayer must show that he has put all his cards face up on the table by giving full details of the specific transaction on which a ruling is sought. The taxpayer is to treat HMRC with complete frankness and make full disclosure of all the material facts known to him. The situation calls for utmost faith on the part of the taxpayer: see MFK at p.1569E, p.1575B.
(c) full disclosure will not have been made where statements made in the clearance request are materially inaccurate or misleading. It does not follow that full disclosure has been made because sufficient information was disclosed to enable inference to be drawn therefrom. Where a piece of information essential to the deliberations required of HMRC by the taxpayer was not furnished to them there is no unfairness in revoking a clearance: see R v. IRC (ex parte Matrix Securities Limited) [1994] 1 WLR 334 at p.342B, p.352B, p.354B & H and p.356A & G.
(d) the requirement for full disclosure will be especially difficult to satisfy if there has been a purely oral exchange with a tax official. Full disclosure requires the taxpayer to disclose the perceived problem which the taxpayer wishes to have addressed: see Corkteck Ltd v HMRC [2009] STC 1681, at [30]-[31].
(4) Where a clear and unambiguous undertaking has been made in a Clearance Letter it must be shown that it would nonetheless be fair to allow HMRC to depart from it: see In the matter of an application by Geraldine Finucane for Judicial Review for Judicial Review (Northern Ireland) [2019] 3 All ER 191 at [62].
(5) In a tax context it is for the taxpayer to demonstrate a high degree of unfairness in order to override the public interest in HMRC collecting taxes in accordance with the law: see R (oao Aozora GMAC Investment Ltd) v. HMRC [2020] 1 All ER 803 at [52].
(6) Where the taxpayer has a legitimate expectation as to a particular tax treatment, they also have a legitimate expectation that it will not be withdrawn retrospectively and that any withdrawal will be managed fairly. Reasonable notice of any withdrawal should be given so as to allow the taxpayer time to make any necessary adjustments to its affairs: see R (on the application of Cameron v Ors) v HMRC [2012] STC 1691 at [71] and GSTS at [96]-[101].
(7) Where the taxpayer has a legitimate expectation from a Clearance Letter it is unfair for HMRC to depart from it retrospectively in circumstances where the Claimant has relied upon it in carrying on its business and has no mechanism for recovering the VAT now retrospectively demanded: see GSTS at [99] and in contrast to R (oao Dixons Retail plc) v. HMRC [2018] EWHC 2556 (Admin) at [67].
(8) It is unreasonable and/or an abuse of power for HMRC to depart from a long-standing treatment of a taxpayer that HMRC has either agreed or implicitly accepted: see R v. IRC ex parte Unilever [1996] STC 681 at p.690-692.
(1) VAT is generally charged on supplies of services (ss.1 & 4 Value Added Tax Act 1994 ('VATA')). A supply for VAT purposes is anything done for a consideration (s.5(2) VATA).
(2) A supply is effected for consideration only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance. Consideration of economic realities is a fundamental criterion. The starting point is to consider the effect of the contractual documentation and assess that against the economic and commercial reality: see Adecco (UK) Limited and others v HMRC [2018] EWCA Civ 1794, [2019] 1 All ER 615 at [38].
(3) The VAT system, both European and domestic, is also subject to the principle of abuse of law: see Halifax plc v Customs and Excise Commissioners (Case C-255/02) [2006] Ch 387, Revenue and Customs v Pendragon plc & Ors (Rev 1) [2015] UKSC 37, [2015] 1 WLR 2838 ('Pendragon') at [7][8]. An abusive practice can only exist where the transactions result in the accrual of a tax advantage the grant of which would be contrary to the purpose of the taxation provisions, and the essential aim of the transactions is to obtain a tax advantage. Identifying the "essential aim" depends on an objective analysis of the method used to achieve the commercial purpose. It is necessary to analyse each transaction by which it is achieved. Because the purpose of each step will generally be to contribute to the working of the whole scheme, the effect of the whole scheme has also to be considered: per Pendragon at [12], [13], [31].
Full and Frank Disclosure
(1) That when the cadets transferred their bonds with APL to their employer airlines, their salaries may (i) be reduced by reference to the value of the 'security bond', or (ii) if the 'security bond' was forfeited, they may receive a higher salary;
(2) APL's perceived problem with what the fact of the cadet's salary being adjusted by reference to the 'security bond' might lead HMRC to conclude;
(3) The easyJet contract showing that the payment of reduced salaries was in fact an integral part of the scheme devised by those in the claimant's corporate group;
(4) That the salary arrangements vis-ΰ-vis the 'security bond' repayment were different depending on the airline involved and that there were also different types of cadets; and
(5) The contents of the NSC request made in 2002 in relation to a previous iteration of the arrangement by McAlpine, which specifically referred to the potential use of a 'salary sacrifice' arrangement in relation to the repayment of the 'security bond'.
(1) The NSC Request was not materially inaccurate or misleading;
(2) HMRC were perfectly well aware of the fact that Cadets' salaries might be reduced to reflect the repayment of Security Bonds, because:
(a) it could in any event be inferred from the Programme brochure that some sort of salary sacrifice arrangement was in place to reflect the fact that sponsor airlines were, in effect, paying for the cadet's training;
(b) HMRC had been informed in 2002 as part of the clearance of a predecessor scheme that repayment of the bond (then called a loan) could be made by way of salary sacrifice; and
(c) Officer Smith had been informed of the fact that some cadets had been offered a choice of lower salary and refund of the bond or higher salary and no refund at the visit to APL on 15 April 2009, and that Ms Bellamy was aware of the report (and brought it to the attention of Ms Best) as part of the NSC Request consideration;
(3) In any event, this was not something which HMRC in fact considered was relevant to the VAT analysis (and nor was it, in fact, relevant to the analysis). HMRC simply changed its mind about the VAT treatment in 2016, which it was entitled to do providing it was not applied retrospectively and revoked with reasonable notice so as not to produce unfairness;
(4) It was not necessary to provide the easyJet contract, as this did not add to what HMRC was already aware of; and
(5) The issues relating to different approaches by different airlines and/or cadet status were not material.
Was the NSC Request and its attachments materially inaccurate and/or misleading?
'3. [ ] you agree that the Bond you entered into with CTC in the sum of £69,000 will be transferred to easyJet.
4. Upon commencing employment with easyJet and as a condition of you commencing employment, you are required to lend easyJet £69,000 (the Loan). easyJet shall repay you the Loan at the rat of £11,223 per year for seven years (totalling repayments of £78,564, which includes an amount in respect of interest, that will be paid net i.e. after basic rate tax) providing you remain in employment with easyJet [ ]'
(1) The statement within the body of the NSC Request that, '[The bond] is repaid to the cadet over an agreed period of time by the sponsor airline'.
(2) The statements within the Programme brochure that 'The airline will then return the bond to you over a defined period, providing you remain employed with that airline' and, 'on employment, you will normally be paid a cadet entry salary. In addition you will receive a monthly repayment of the training bond.'. The use of the phrase 'in addition' is designed to give the impression that the bond re-payment is on top of their salary. I reject as wholly implausible the suggestion by APL that any reasonable reader of this would read into the phrase 'cadet entry salary' (whether in the brochure or on the website) the existence of a scheme whereby the amount of their starting salary was determined not by the level of their training, qualification and experience but by the fact of whether they had trained through the APL programme and had therefore to sacrifice part of their salary in order to pay for the training they had received.
(3) The statements within the website that the Foundation Course is 'the only part of the training that you are required to pay for' and 'In this unique programme, your future employer will sponsor the majority of your training (excluding the Foundation Course)'. Both these give the clear impression that the cadet's training costs are met by the 'sponsor', rather than the cadet. In reality, this was not the case. The 'sponsor' was not paying for the training: the cadet was paying for all their own training in circumstances where its bond was not meaningfully returned to it.
(1) Mr Steele's comment in my judgment merely reflects the obvious reality that if the cadet's salary is reduced by a similar amount to the 'repayment' of the bond when compared to those who either forfeited the bond or are being recruited unencumbered by a bond, there is no real repayment of the bond to the cadet at all. In these circumstances, one obviously legitimate conclusion is that the cadet has paid for his or her own training through the vehicle of the bond coupled with the salary sacrifice arrangement;
(2) It is not an answer to assert merely that the arrangements between the airline and the cadet are either out of APL's control or none of its concern: APL effectively makes a positive representation in the NSC Request as to what in fact happens to the security bond after it is paid across to the airline. APL might have said, simply and accurately (for example) that 'The arrangement as to whether and if so how the bond is then repaid by the airline to the cadet is a matter for those parties'. Even this might legitimately be criticised for failing to include positive disclosure about the known fact of salary sacrifice arrangements. In any event, APL chose to make a positive statement which, in the context of the salary sacrifice arrangement, was plainly inaccurate; and
(3) Moreover APL cannot distance themselves from the importance of the salary sacrifice arrangement as part of the overall arrangement in circumstances when it was CTC itself that provided the predecessor scheme (which APL correctly asserts is materially similar to the 2009 Programme) and which, as set out in the 2003 easyJet contract, is stated as having been 'devised by CTC comprising all of the following elements':
'The transfer of the bond to the airline on completion of pilot training
The payment by the airline of a reduced salary scale
The repayment by the airline of the bond to the pilot over a period of employment'
'2. The decision maker ought to take into account a matter which might cause him to reach a different conclusion to that which he would reach if he did not take it into account. Such a matter is relevant to his decision making process. By the verb 'might' I mean where there is a real possibility that he would reach a different conclusion if he did take that consideration into account.
[ ]
6. If the judge concludes that the matter was 'fundamental to the decision' or that it is clear that there is a real possibility that the consideration of the matter would have made a difference to the decision, he is thus enabled to hold that the decision was not validly made.'
'But, as Lord Nicholls of Birkenhead explained in In re H (Sexual Abuse: Standard of Proof) (Minors) [1996] AC 563, 586, some things are inherently more likely than others. It would need more cogent evidence to satisfy one that the creature seen walking in Regent's Park was more likely than not to have been a lioness than to be satisfied to the same standard of probability that it was an Alsatian. In this basis, cogent evidence is generally required to satisfy a civil tribunal that a person has been fraudulent or behaved in some other reprehensible manner. But the question is always whether the tribunal thinks it more probable than not.'
'I think that the time has come to say, once and for all, that there is only one civil standard of proof and that is proof that the fact in issue more probably occurred than not.'
'64. My Lords, Lord Lloyd's prediction proved only too correct. Lord Nicholls' nuanced explanation left room for the nostrum, "the more serious the allegation, the more cogent the evidence needed to prove it", to take hold and be repeated time and time again in fact-finding hearings in care proceedings (see, for example, the argument of counsel for the local authority in Re U (A Child) (Department for Education and Skills intervening) [2004] EWCA Civ 567, [2005] Fam 134, at p 137. It is time for us to loosen its grip and give it its quietus.
[ ]
70. My Lords, for that reason I would go further and announce loud and clear that the standard of proof in finding the facts necessary to establish the threshold under section 31(2) or the welfare considerations in section 1 of the 1989 Act is the simple balance of probabilities, neither more nor less. Neither the seriousness of the allegation nor the seriousness of the consequences should make any difference to the standard of proof to be applied in determining the facts. The inherent probabilities are simply something to be taken into account, where relevant, in deciding where the truth lies.
71. As to the seriousness of the consequences, they are serious either way. A child may find her relationship with her family seriously disrupted; or she may find herself still at risk of suffering serious harm. A parent may find his relationship with his child seriously disrupted; or he may find himself still at liberty to maltreat this or other children in the future.
72. As to the seriousness of the allegation, there is no logical or necessary connection between seriousness and probability. Some seriously harmful behaviour, such as murder, is sufficiently rare to be inherently improbable in most circumstances. Even then there are circumstances, such as a body with its throat cut and no weapon to hand, where it is not at all improbable. Other seriously harmful behaviour, such as alcohol or drug abuse, is regrettably all too common and not at all improbable. Nor are serious allegations made in a vacuum. Consider the famous example of the animal seen in Regent's Park. If it is seen outside the zoo on a stretch of greensward regularly used for walking dogs, then of course it is more likely to be a dog than a lion. If it is seen in the zoo next to the lions' enclosure when the door is open, then it may well be more likely to be a lion than a dog.'
(1) consideration of economic realities is a fundamental criterion (Adecco); and
(2) in considering the question of abuse, the effect of the whole scheme has to be considered (Pendragon).
(1) in setting out the facts of the case in the policy advice request on 11 June 2009, and in the internal email seeking advice from Mr Wright, Ms Bellamy included both times that her understanding was that during the course of employment, the pilot is gradually repaid the bond money;
(2) Mr Wright understood that the bond arrangement replicated others in which 'the airline does not want to pay for the very expensive training of a pilot without some sort of financial tie to the airline'. This was a clear misunderstanding: in the easyJet arrangement, the airline did not want to pay for the very expensive training at all;
(3) Ms Best expressly noted in her policy advice, which led to the 2009 ruling, those parts of the Programme brochure stating, 'The airline will then return the bond to you over a defined period, providing you remain employed with that airline.';"
(4) Ms Best plainly considered that the feature in which the bond was repaid to the cadet was an important part of the overall arrangement, not least in the last paragraph of her advice before her conclusion:
'The bond, and in particular the prospect of being repaid it through salary seems to me to be the incentive for the cadet to stay with APL. A cadet could obtain training anywhere presumably but the advantage with APL is the probability of getting the cost of training back as well as a placement with an airline.'
In this regard, I reject the submission of Ms Shaw that the reference within Ms Best's advice and the Clearance Letter that the phrase, 'to be repaid to the cadets through salary over an agreed period' (emphasis added) was recognition by the HMRC of the existence of a salary sacrifice arrangement. This cannot be possibly correct where Ms Best also uses the phrase 'through salary' in the short paragraph quoted above whilst, in the same breath, goes on to confirm her understanding that there exists 'the probability of getting the cost of training back .'. The effect of the salary sacrifice arrangement is that the cadet does not get the cost of training back. Moreover, use of the phrase 'repaid to the cadet' is wholly inconsistent with the reality that nothing is meaningfully repaid to the cadet. Use of the phrase 'through salary', simply means something along the lines of 'through payroll' or 'as part of your salary'. I therefore do not accept that the inaccurate impression given by the NSC Request and attached documentation that the bond money is repaid from the airline to the cadet as part of the arrangement is capable of being upturned to mean precisely the opposite (i.e. the bond money is ultimately paid from the cadet to the airline by a salary sacrifice) simply by use of the phrase 'through salary', and HMRC plainly did not read it in the way Ms Shaw submits at the time; and
(5) that HMRC's misunderstanding was material is also evidenced in communications which followed the 2009 Ruling, as well. For example, in her letter of 17 December 2009, Ms Bellamy stated:
'On consideration of the earlier clearance, HMRC accepted that the security bond paid to APL by the trainee pilot is not a consideration for supply by APL. A major factor in reaching this decision is that the bond is transferred to the sponsor airline employing the newly qualified pilot on completing of training and is then refunded by that airline to the pilot over the course of the employment. In effect, the airline is covering the training costs.'
I reject Ms Shaw's suggestion in argument that what Ms Bellamy is conveying in this paragraph is the importance of the fact that the bond is not retained by APL. She is doing no such thing: instead she is plainly saying that a 'major factor' in the decision to give the ruling in APL's favour was HMRC's understanding that the bond was refunded to the pilot over the course of their employment, such that 'in effect, the airline is covering the training costs.' The reality is precisely the opposite. HMRC's inaccurate impression, generated by the NSC Request and attachments, was stated to be (long before the present dispute arose) a 'major factor' in granting the ruling.
(1) it is right that in the 2002 ruling the fact that salary sacrifice would play a part in the overall arrangement was identified as part of the Ruling Request, and the ruling accepted that the 'joint venture will be receiving supplies from the two parties and providing an onward supply of training to the airline industry within the United Kingdom'. However, the outcome of the 2002 request (particularly in circumstances where there is no documentation that sheds light on the reasoning) cannot assist when considering whether the fact of salary sacrifice may have been material to those considering the 2009 ruling request. On the basis of the evidence above, the misunderstanding was not just material in 2009 but 'a major factor';
(2) Ms Shaw argues that the fact was disclosed to Officer Smith and asserts that Officer Smith did not regard it as material. However, Officer Smith plainly was not called upon to put his mind in any focussed fashion to the question of the bond arrangement, which was simply not a question which was before him. What Officer Smith did or did not think is not relevant (and certainly not determinative of) whether the inaccurate and misleading description of the bond arrangement was 'material' to those whose job it was in fact to consider the bond arrangement;
(3) It is said that Officers Bellamy and Best had regard to the report of Officer Smith when considering the 2009 ruling, in reliance on the evidence of Mr McBride. At paragraph 43 he states:
'The report shows that Christine Bellamy and Anne Best did look at Officer Smith's audit report, although I cannot say whether they considered the whole report or simply looked at the front page,'
Even assuming they looked at the full report, it is plain (as I have found as a fact) that on the basis of all the information before them, Ms Bellamy and Ms Best plainly believed that, in accordance with the misleading impression generated by the NSC Request and the documents it attached, the arrangement involved the cadet having their bond meaningfully returned to them, and that as a result the cadet did not generally therefore pay for their own training. I will consider the Smith report further below in the context of full and frank disclosure, but in the context of the present question of materiality, reference to the Smith report does not advance APL's argument; and
(4) Finally, reliance is placed on the fact that the salary sacrifice point only played a 'minor' part of the alternative decisions on economic reality and abuse in the Liability Letter of January 2021. This point has been considered already: the fact that the salary sacrifice issue formed some material part of the later HMRC decision on the basis of the first alternative position relating to economic reality is a proper basis to conclude, not least in conjunction with the other relevant matters I have identified, that there is a real possibility that had the NSC Request and attachments not given an inaccurate and misleading impression of the bond arrangement in relation to cadet repayment, it would have made a difference to the decision.
Was there full and frank disclosure?
'This means that he must give full details of the specific transaction on which he seeks the revenue's ruling unless it is the same as an earlier transaction on which a ruling has already been given'
(1) There will be situations (as rightly identified by Ms Shaw in argument) where the specific transaction in respect of which a ruling is sought is identical to a previously ruled upon transaction but, for example because of a change of relevant company, a further ruling is required. In these circumstances, as Bingham LJ makes clear, a party need only identify the previous ruling, identify any material difference, and request the new ruling. It will not have to rehearse all the details again;
(2) This is entirely different from the scenario where, as here, whilst reference is made to a previous ruling, APL and its advisors considered it necessary to set out in detail what it considered to be all the relevant aspects of the new scheme (even if materially similar to an earlier one) for the purposes of seeking the new ruling. In these circumstances, HMRC is reasonably entitled to assume that in setting out all the details of the new arrangement, the taxpayer has done this fully and accurately; and
(3) Even if this were not generally the position, in the present case, APL's submission is particularly unattractive in circumstances where, upon receipt of the NSC Request, HMRC specifically told APL that it could find no record of the 2002 ruling and requested APL to provide 'a copy of any relevant correspondence and documentation'. The 2002 ruling request now relied upon by APL is plainly 'relevant [ ] documentation' and should have been provided in response to this request. APL provided the 2002 ruling itself but, although it was in possession of the ruling request (it was disclosed in the course of this dispute), APL did not provide it. It is not necessary for me to determine whether, consistent with the comment in the draft NSC request relating to the removal of any reference to salary sacrifice, this was a conscious decision or merely an oversight. However, in my view it does not lie well for APL now to place reliance upon the contents of a document that it was asked to provide, and did not. I also reject the contention advanced by Ms Shaw that HMRC has a burden to prove that it did not have a copy of the ruling request, but even if it does I am satisfied on the basis of the internal contemporaneous communication dated 17 March and quoted at paragraph 23 above that HMRC took reasonable efforts to locate the 2002 documents at the time but they could not be found for the reasons stated at the time.
(1) It is, at best, double edged for APL. Even in the context of limited discussion which took place on 15 April 2009, it is plain that APL were not being completely frank with Officer Smith. The salary sacrifice scheme was not limited to 9 cadets from Monarch: it was an integral part of how the scheme was initially devised by CTC for easyJet, APL's biggest customer. This fact was not, but should have been, disclosed;
(2) The note also demonstrates that the fact of some link between salary levels and bond forfeiture could have a 'significant impact' on the treatment of the bond arrangement by HMRC. Bond forfeiture was an option under the easyJet arrangement, even if not generally taken up, and yet (even after the conversation with Officer Smith), APL did not then bring this to HMRC's attention;
(3) Whilst I confess I do not necessarily understand the distinction Officer Smith draws between what appear to me to be two sides of the same coin, the exchange can in no way be said to constitute the correction of a material inaccuracy on the face of the NSC Request or somehow the fulfilment of APL's duty of complete frankness with regard to the existence of salary sacrifice arrangements; and
(4) Furthermore, it was not, in any event, for HMRC to 'piece together' the correct picture from different sources of information provided at different times and in different contexts: Officer Smith's visit and oral discussion was part of a general audit and not specific to the bond investigation. HMRC would have been entitled to assume that if anything material had been said, it would be said expressly and in the NSC Request. Whilst as I have identified above, the evidence is that Officers Bellamy and Best were aware of and opened the audit report, the evidence is also clear that even having done so they relied wholly or principally upon the description of the scheme as set out within the NSC Request and the attached documents, and this approach was entirely reasonable. It is clear that they were, as a result, under the misapprehension that cadets were meaningfully repaid.
(1) I conclude that APL should not only have disclosed the fact of salary sacrifice arrangements, but also the fact that this was an integral part of the scheme as it was initially devised by CTC and 'sold' to easyJet. Whether they did this in narrative form or by providing the easyJet contract which makes this clear is immaterial.
(2) Implicit in providing full details of the salary sacrifice arrangements with sponsor airlines would have been the disclosure of the fact that different arrangements existed with different sponsor airlines, which I accept would also have been material to HMRCs consideration of VAT treatment of the arrangement: for example, it might conclude that different VAT treatment is appropriate depending upon what ultimately happens to the bond monies.
(3) I do not accept that the distinction between 'whitetails' and 'tagged' cadets would have been material and not bringing this distinction to HMRC's attention was probably not a failure on APL's part.
(4) Failure to provide the 2002 ruling request is not a valid ground of complaint in its own right, and does not materially add to my conclusion relating to the failure to have disclosed the salary sacrifice arrangements. If APL wanted to rely upon the contents of that ruling request, however, they should have identified this specifically and ensured HMRC had it.
(5) There will be some circumstances where a failure to identify the particular problem a taxpayer perceives may exist will be regarded as a failure to have been completely frank with the HMRC (as indeed was the case in R (on the application of Corkteck Ltd) v Revenue and Customs Commissioners [2009] EWHC 785 per Sales J as he then was at [30(b)]). In the present case, APL should have, as I have found, fully and frankly described the nature and extent of the salary sacrifice arrangements, their integral role in the easyJet contract, and APL should have corrected the misleading impression clearly given by the materials that the cadets' bond monies would be repaid by (all) the sponsor airlines. Doing this clearly identifies the facts which give rise to the perceived problem. As Deloitte correctly advised, some description of the 'the reason for uncertainty' should be included within a fully frank request. In this case, Deloitte flagged that the area of uncertainty was whether the deposit of a security bond by the Cadet with APL should, or should not, not be treated as a supply for VAT purposes. The identification of the issue was sufficient. What was problematic was the inaccurate and misleading representation of the overall arrangement, rather than in failing to alert HMRC to the perceived problem with more specificity.
APL's Alternative Case
(1) APL operated the Programme and accounted for VAT on the basis that the bonds were not consideration for taxable supplies of training for a period of approximately 17 years;
(2) By making the NSC Request, APL sought reliable confirmation as to the VAT treatment of the bonds and in fact relied upon it;
(3) At no point did HMRC indicate that they require more information in order to provide the confirmation, and prior to the meeting in September 2018 there was no reason to doubt the correctness of the Clearance Letter;
(4) The long-standing treatment of the bonds in accordance with the Clearance Letter can be compared with the practice at issue in R v IRC ex parte Unilever [1996] STC 681.
Conclusion