Lords Decision Leaves UK Facing GBP1bn In VAT Claims

by Robert Lee, Tax-News.com, London

25 January 2008

Businesses in the UK are being urged to examine their records, possibly as far back as 1973, to see if they have a case to reclaim overpaid value-added tax after a landmark decision by the House of Lords on Wednesday.

The dismissal of an appeal brought by HM Revenue & Customs against VAT claims made by Condé Nast Publications Ltd (CNP) and Michael Fleming means that businesses can now claim back under-recovered VAT which they failed to fileclaims for before the Government introduced a new and much shorter time limit for reclaiming overpaid VAT in late 1996.

However, Gerry Myton, VAT partner at PKF accountants and business advisers, believes that there could be only a six month window of opportunity to submit a claim, as the Lords ruled that it would be lawful for HM Revenue and Customs to introduce a prospective cut-off "with adequate warning for claims".

Tax experts suggest that cases related to the ruling are expected to cost the Treasury as much as GBP1 billion in claims and interest, in addition to vast administrative resources needed to process them.

Myton commented that:

“This ruling is hugely significant; overpayments of VAT before the introduction of the three year cap on 4th December 1996 (or 1st May 1997 for certain claims) are still live, so it is not too late for businesses to check their records and submit claims. For tax overpaid after December 1996 (or 1st May 1997 in some cases) the three year cap will apply so claims can only be made within 3 years of the overpayment."

He continued: “VAT was introduced in 1973, so there are potential claims going back that far to be made. The only issue is whether calculations will be made on a compound basis as that will significantly increase the sums payable."

“Given HMRC’s attitude to this over the years, businesses should be entitled to compound rather than simple interest but it may be necessary to go back to court to get that principle established. Currently I have a number of clients who are taking legal action before the VAT and Duties Tribunal on that point.”

Tony McClenaghan, head of indirect tax at Deloitte, which acted for CNP, explained:

“Our client sought to recover VAT on travel and subsistence expenses which it had incurred and which was properly deductible. However, when HMRC introduced the three year cap it refused to repay the VAT which CNP was entitled to recover."

“The successful culmination of the litigation means that CNP will finally receive the VAT which it is lawfully entitled to and clearly this ruling has implications for other businesses.”

On 4 December 1996, the Government first introduced a new three year time limit for reclaiming VAT over-declared on sales (output tax). This was introduced with retrospective effect, and without any transitional arrangements to allow taxpayers to correct earlier errors on their VAT returns.

A few months later, on 1st May 1997, a further three year limitation period was introduced with immediate and retrospective effect for VAT on business costs (input tax). Before this date there was no time limit.

According to Deloitte, the problem with this legislation was that if, for example, a business paid VAT to a supplier on 1st January 1990, it would have been entitled to claim a refund of the VAT from HMRC at that time. However, if it failed so to do, HMRC (or the Inland Revenue, as it was then) had not previously imposed any time limit for making the claim at a later date. By the time of the new regimes, introduced on 4th December 1996 and then 1st May 1997, HMRC maintained that the new law allowed them to block any such claim made after these dates, because it would have been made more than 3 years late.

Deloitte acted for Marks and Spencer in taking a case to the ECJ to challenge the initial December 1996 legislation. Marks and Spencer were successful, and the ECJ declared that it was unlawful for the UK to introduce the new time limit without any transitional periods.

Following the case law of the ECJ in the Marks and Spencer case, the Law Lords have held that although the Government may impose a three year time limit, it cannot introduce it without allowing taxpayers a reasonable time to check their records and to claim input tax which they were entitled to claim before 1 May 1997, but had not yet done so. The House of Lords has now ruled that HMRC were not entitled to block this type of claim, and should prospectively legislate for a specific transitional period to allow claims to be made for overpaid VAT incurred before the cap was introduced in 1997.

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