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Andrew Needham, Director of VAT Solutions (UK) Ltd, comments on the recent House of Lords decision in the Fleming and Conde Naste cases affecting claims for VAT refunds. [The following article was produced before the Budget on 12 March. Please refer to Budget Note 78 for details of proposed changes affecting VAT repayment claims - see also the previous two articles published in the VAT section last month].

Andrew Needham

Significant case

On 23 January, the House of Lords (HoL) gave judgment in the joint cases of Fleming and Conde Nast, finding 5:0 and 4:1 against HMRC respectively.  The Financial Times considered it to be the most significant VAT case this decade, and could allow claims for VAT refunds to be made back all the way back to 1973, albeit possibly not for the whole period.

House of Lords' decision

The HoL held that the 3-year restriction was incorrectly introduced with no transitional period. Such a period could not be later introduced retrospectively by notice rather than legislation, meaning that claims for unclaimed input tax could feasibly be made for the period April 1973 - 30 April 1997.  Although the two cases considered by the House of Lords did not concern output tax, HMRC had acknowledged after its earlier loss at the Court of Appeal that if the input tax cap fails, the cap for overpaid output tax introduced on 4 December 1996 must also reasonably fail.

HMRC respond

Sure enough, in Revenue & Customs Brief 07/08, issued 20 February, HMRC accepted the legitimacy of refund claims for both underclaimed input tax (up to 1 May 1997) and overpaid output tax (up to 4 December 1996).  The Brief advised, however, that HMRC were still considering the wider implications of the judgment, so a further announcement from them seems likely in due course (perhaps as part of the Budget).

Comment

On the face of it, this is a huge blow to HMRC, and could well result in innumerous claims for VAT refunds stretching back many years prior to 1996/7.  However, in reality, one wonders how difficult it will actually be in practical terms for the smaller sized businesses to successfully obtain a refund.  Clearly, those very large businesses that have ‘Big 4’ or top 10 accountancy firms as their advisers will have been kept abreast of this issue all along.  They will doubtless be in a position to present (or have presented for them) massive refund claims backed up by all the appropriate documentary evidence and business records. For the smaller business, though, it is very doubtful whether any records have been kept at all before 2001 (i.e. longer than the statutorily required period of 6 years). It would appear that the validity and likely success of claims based on estimated/extrapolated figures will be very much at the discretion of HMRC, and given their dogged (at times almost blind) resistance to this issue throughout, the prospects for leniency on the issue of completeness of claims and supporting evidence are not great!