Enter Your E-mail

VAT Voice by Andrew Needham

Andrew Needham, Director of VAT Solutions (UK) Ltd, highlights a significant case concerning the time limits for reclaiming VAT.The Court of Appeal has given its decision in an important case regarding the 3-year capping provisions on VAT reclaims. The appellant (Fleming) was a dealer in specialist cars. In 2000, Mr Fleming made a claim for repayment of the input tax paid on the three cars purchased in 1990. HMRC (C&E as was) refused the claim on the basis that the claim was made after 1 May 1997 and was therefore capped under Reg 29(1A) of the VAT Regulations 1995. Mr Fleming’s appeal had previously failed at the VAT Tribunal and High Court.

The Judgement

The Court of Appeal (CoA) found that the real issues of this case were whether EU VAT law would recognise and/or imply a national transitional period (i.e. one not specifically set out in legislation) and, if so, by reference to what event that period should be fixed. The CoA held that a transitional period could not be read into Reg 29(1A), which was incompatible with the principle of effectiveness, and fell foul of the ECJ decision in Marks & Spencer which stated at paragraph 38 that ‘transitional arrangements allowing an adequate period after the enactment of legislation for lodging claims for repayment’ were required. The regulation should therefore be disapplied. The judgment is extremely interesting, with a unanimous rejection of HMRC's case but for different reasons. Arden LJ tried to read a transitional period into Reg 29, suggesting it would start on 11 July 2002 (the date the ECJ decided Marks & Spencer) and end six months later, but this was a leap too far for the other two judges, Ward LJ and Hallett LJ, who simply concluded that as there was no transitional period in the Regulation, the Reg. 29(1A) cap was disapplied. Ward LJ also ruled that a transitional period could not be read into Reg 29(1A) on the basis that one cannot construe something out of nothing.

The future of capping

This is a major defeat for HMRC's capping provisions. It could be suggested that there is now no cap for late input tax claims at all until HMRC change the law to make it compliant with EU principles! However, this is likely to be an unsustainable argument, as the Marks & Spencer case confirmed that Member States have the power to introduce a cap, and may retrospectively shorten the time to make a claim provided that pre-existing rights are protected by an adequate transitional period. Curtailing future rights that only arise after the time limit comes in is not a problem.

This decision confirms that any input tax claim where the right to claim arose before 1 May 1997 should not be capped. If Arden LJ is right, this VAT should have been claimed by 11 January 2003 in order to benefit from this. However, if the majority decision is right, this VAT can be claimed now, irrespective of when the error was discovered. The same principles should also apply to output tax overpaid by repayment traders as such claims are also covered by the secondary capping legislation. On the basis of the majority reasoning, since no transitional provision was introduced for the s80 VATA 1994 primary cap either, it is now arguable that the s80(4) time limits are ineffective for claims for overpaid output tax by payment traders prior to 4 December 1996.

We must now await HMRC’s reaction to this defeat, and whether they will seek leave to appeal to the HoL. In the meantime, old repayment claims should now be revisited.

March 2006

Andrew Needham

Andrew Needham
Director, VAT Solutions (UK) Ltd
Email: andrewneedham@vatsolutions-uk.com


VAT Solutions (UK) Ltd
1 Dundonald Avenue
Stockton Heath
Warrington
WA4 6JT

(T) 01925 212244
(F) 01925 212255
(M) 07810 433927
(W) www.vatsolutions-uk.com

VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via their website: