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VAT Voice by Steve Allen

Steve Allen, Director of VAT Solutions (UK) Ltd, comments on a recent VAT Tribunal decision regarding a ‘windfall’ VAT assessment.We should all have learned two valuable lessons from a recent VAT Tribunal decision. Firstly, it is important to make sure that any VAT errors are adjusted the correct way, and secondly, HMRC have discretion which, although they are unwilling to exercise, the Tribunal is more than prepared to exercise on their behalf.

Background

In the case of Technip Coflexip Offshore Ltd (No 19,298) the taxpayer inadvertently charged VAT on supplies that were actually outside the scope of UK VAT. The customer got into financial difficulties, so they invoiced for the balance of the contract, and when it was not paid, made a bad debt relief claim to recover the VAT it had charged, accounted for, and then been unable to collect.

HMRC came out to visit Technip, and identified that bad debt relief had been claimed on a supply that should never have been subject to VAT in the first place. The Officer disallowed the claim and issued an assessment for over £600K. He informed Technip that they should have issued a credit note to adjust the error, not claimed bad debt relief, and as the supplies were now more than three years old, they were caught by the three year capping provisions. Consequently, Technip could not now claim back the VAT.

Decision

In his decision, the Tribunal Chairman stated that the “Commissioners do have a discretion in the matter of making an assessment. The enabling provisions use the word "may". The Commissioners accordingly may make an assessment or they may not. There is nothing imperative in the statute. Even if there was an ascertained and justified sum due the Commissioners still are not obliged to issue a demand for it.”

The Chairman went on to say: “The circumstances of the present case are that the effect of what the Commissioners have done is to attempt to secure to themselves a sum of money which never was due in reality and always fell outside the scope of the tax. There never was a taxable transaction. There could be no tax point. It is in such circumstances that the Commissioners, in the Tribunals view, are required to consider whether they are justified in seeking, obtaining or retaining this windfall which in our view would be a matter of unjust enrichment, before making an assessment like the present. As a public body they have to consider the appropriateness of the whole circumstances, and not to seek a manifestly unfair advantage.”

Not surprisingly, given the Chairman’s comments the Tribunal found in favour of the taxpayer.

Comment

This is an interesting decision, in that it confirms that HMRC have the discretion not to issue an assessment if the result would be patently unfair, and would “unjustly enrich” the exchequer. If a business finds itself in a similar position – i.e. where HMRC wants to issue an assessment that will provide an unfair windfall for the exchequer that it is not entitled to – it should quote this case. If HMRC will not accept the precedence set by this case, it is likely that the Tribunal will if you pursue the matter there.

The other point to remember about this case is that it emphasises the importance of, firstly, correctly identifying the liability of the supplies that you make and, secondly, using the correct method of adjusting for errors, i.e. issue a credit note, claim bed debt relief, or make a voluntary disclosure. If you choose the wrong method, HMRC will try to disallow the claim on a technicality, and you will then have the inconvenience of having to fight him for your money back.

May 2006

Steve Allen
Director, VAT Solutions (UK) Ltd
Email: steveallen@vatsolutions-uk.com

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

(T) 01925 212244
(F) 01925 212255
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(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: