As part of his monthly column for Tax Journal, Victor Cramer examines a recent dispute between Lockheed Martin and HMRC. This case reminds us that the First-tier Tribunal can reach a decision on a basis other than one put forward by the parties.

LMUK, a name well known to VAT practitioners, operates the well-known Nectar scheme. It also supplies radar and mission control systems to the Royal Navy for use in Merlin helicopters.

Do not get excited. The Nectar scheme has not started offering military hardware, nor will you see aircraft carriers at petrol stations. In the recent case of Lockheed Martin UK Ltd v HMRC [2021] UKFTT 448 (TC), the First-tier Tribunal (FTT) used the same abbreviation for a different taxpayer. That case raises an interesting procedural and jurisdictional point.

The dispute concerned whether a supply of retrofit surveillance systems fell within VATA 1994 Sch 8 Group 8 item 2: ‘The supply, repair or maintenance of a qualifying aircraft or the modification or conversion of any such aircraft provided that when so modified or converted it will remain a qualifying aircraft’.

Lockheed contracted to retrofit Merlin Mk II helicopters with surveillance and mission control systems. The contract and works were complex, involving the supply of software, training and hardware, some of which was removable depending on the role of the aircraft at a given time.


The judgment

At para 251 of the judgment, the FTT opines that it is unusual for points about the burden of proof to make a substantial difference to the outcome. That may be true for technical points about the burden of proof, but it is less true about evidence in general. There are plenty of winnable cases lost for want of the right evidence. This is one. Lockheed failed to prove that its supply modified aircraft.

Unless you supply helicopter surveillance systems, the outcome is of less interest than the approach taken by the FTT.

At para 13, the FTT suggested that both parties might be wrong, and suggested its own alternative analysis.

The taxpayer submitted that the UK court system is an adversarial system, in which the role of the courts is to adjudicate on the issues and arguments raised by the parties. It relied on decisions from the Court of Appeal and Supreme Court, most clearly propounded in Air Canada v Secretary of State for Trade [1983] 2 AC 394 (at 438): ‘In a contest purely between one litigant and another … the task of the court is to do, and be seen to be doing, justice between the parties … There is no higher or additional duty to ascertain some independent truth’.

The FTT cited para 15 of Tower MCashback LLP and another v HMRC [2011] STC 1143: ‘There is a venerable principle of tax law to the general effect that there is a public interest in taxpayers paying the correct amount of tax…’



The point is simple, but important. There are three stakeholders in every tax dispute: the appellant, the respondent, and the public. In commercial disputes, it is sufficient that justice is done as between the parties. In tax disputes, justice must be objectively achieved. The tribunal is not looking for the best of the arguments presented; it is looking for the right answer.

The practical impact? It perhaps states the obvious, but advisers must look for the right answer. One cannot rely on winning simply because HMRC has the wrong end of the stick. A prudent taxpayer (and adviser) will prepare to address alternative possibilities in case the tribunal raises them. Unprepared litigants who rely solely on HMRC’s skeleton arguments may find themselves sunk by unexpected torpedoes.


The article in the Tax Journal can be found here.



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