“HMRC are not of course infallible…”

The above quote from Lord Justice Lewison in the Leeds City Council vs HMRC Court of Appeal case plays a key role in the recent successful Aggregates Levy appeal of Lovie Limited [TC07606].

Lovie Limited (Lovie) operates a number of quarries, each of which is registered for Aggregates Levy. In 2013, Lovie submitted a claim to HMRC on the basis that the output from the Cottonhill Quarry at Macduff was mainly slate and, as a result, should have been exempt from the levy. This claim was supported by a report from Dr Martin Kirk, a geologist and Director of Kirk Natural Stone Developments Limited. In reviewing the claim, HMRC engaged the services of a geologist, Dr Robert Barnes. Dr Barnes made a site visit to the quarry and collected a number of samples for thin section analysis.  This review showed that the quarry was composed of mainly meta-mudstone, meta-siltstone with a small element of meta-sandstone.   

Following this review, Dr Barnes conclusion was that the output from the quarry was not more than 50% slate. In response to Dr Barnes report, Dr Kirk undertook a detailed lithological logging of the quarry. These logs were provided to HMRC to support the taxpayers view that the output was more than 50% slate.  Having reviewed the information provided by Dr Kirk, Dr Barnes advised that he had not changed his opinion that the rock at the Quarry “is not composed mainly of slate as defined in Merriman…”  

Merriman was a report commissioned by HMRC. The Introduction to the report states that “Problems have arisen with the precise definition of the terms ‘shale, slate and clay’”. The Merriman report was commissioned to assist HMRC officers during site visits. References to the Merriman report were included in HMRC’s Public Notice AGL1 until 2014 when it was removed as the purpose had been to assist HMRC and was not considered appropriate to a Public Notice. 

Merriman was central to the Appeal. Merriman identified three issues that needed to be considered when defining rock as slate: 

• The protolith of slate; 
• The upper grain size of slate; and 
• The significance of cleavage. 

Throughout the discussion of the Merriman, all parties identified inconsistencies in the report. Despite these inconsistencies, Dr Barnes relied on Merriman in arriving at his conclusions. In both the reports and his evidence before the Tribunal, he advised that he adopted Merriman in order “to be consistent with how HMRC operated.”  Dr Barnes’s reasons for adopting Merriman and his approach to the inconsistencies in the report was important. Dr Barnes adopted the definition in the Glossary of the Merriman which stated that slate is: 

• the metamorphic equivalent of mudstone and shale;  
• with grain size of less than 32µ; and  
• with a well–developed slaty cleavage. 

He confirmed that he disagreed with certain aspects of Merriman and decided to disregard elements of the report where this was inconsistent with the definition in the Glossary. This definition used by Dr Barnes had the result that the scope for the Aggregates Levy exemption was reduced. 

The Tribunal highlighted that the Merriman report also stated that “Siltstone, clay, shale and mudstone are very-fine-grained sedimentary rocks.  Slate is the low-grade metamorphic equivalent of these rocks”. This definition included siltstone as a protolith of slate. On grain size, Merriman stated that “the division … generally used by the industry and scientifically, is taken as 63µ.  However, 32µ is a useful division…” As the tribunal found, the 32µ division may well be “useful” for HMRC as it limits the extent of the exemption but that does not make it correct. Finally, Dr Barnes focussed on well–defined slaty cleavage as apparent in roofing slates but ignored the references in Merriman to uses where “slaty cleavage is less important” and “rocks exhibiting a weak slaty cleavage that would be unsuitable for cleaving may be much more extensive but still be classified as slate”. 

The Tribunal noted that, whilst Dr Barnes was clearly an expert in his field, his reasons for adopting Merriman and his limited or lack of reliance on certain elements of the report meant that Dr Barnes did not act as an expert witness under the rules of the Tribunal. As a result, the Tribunal was required to disregard his views on the documents and on the oral evidence provided by Dr Kirk. 

Despite the prominence of Merriman in the discussions, although considered useful, the Tribunal did not consider it as a definitive guide to the definition of Slate. The Tribunal instead referred to a British Geological Society Rock Classification Scheme report (RR99/02). Finally, the Tribunal found that the 20 hours detailed logging undertaken by Dr Kirk would be more accurate in establishing the make-up of the quarry than Dr Barnes observations in the 4 hours he spent at the quarry.   

Based upon the totality of the evidence provided, the Tribunal found that the Cottonhill Quarry is mainly comprised of slate and allowed the appeal. 

AAB Comment 

This is a useful reminder that although HMRC provide the public with information in Notices, Business Briefs and VAT manuals, these are not the law they are simply HMRC’s opinion of the legislation. As Lord Justice Lewison highlighted, HMRC are not infallible. 

Consequently, whether it is in their published guidance or in correspondence with taxpayers, HMRC’s view is not always correct. If you receive a ruling or decision from HMRC which you disagree with, AAB’s Tax Dispute Resolution team can assist. As with the Lovie case, this may involve supporting our clients through the Tribunal Appeal process. However, AAB’s preferred approach is more about providing early support to prevent a dispute rather than managing and resolving a dispute when it occurs. In our Tax Disputes Resolution team, we have a diverse team of specialists covering all taxes and business areas. Our team is able to support clients with every aspect of their interaction with HMRC from strategy through to resolution.   

If you would like to discuss either our indirect tax or tax dispute resolution services, please don’t hesitate to get in touch.

By Alistair Duncan, Head of Indirect Tax

Find out more about our Indirect Tax team.