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Andrew Needham, Director of VAT Specialists Ltd, highlights a selection of recent VAT case decisions.

High Court says compound interest is due on overpaid VAT, but claim was out of time

The High Court has given its judgment in the first case to consider whether taxpayers can claim compound interest on overpaid VAT.

The Appellants argued that there were three mistakes/breaches which should be addressed by either damages or restitution:

1. The Liability Mistake - the incorrect interpretation of directly effective EU rights which are not given effect in domestic law and have resulted in the VAT overpayment.
2. The Time Limit Mistake - the incorrect implementation of the three year cap.
3. The Simple Interest Mistake - interest calculated incorrectly i.e., as simple interest

On the issue of damages, the Court held that the breaches were not significant enough to evoke a claim for damages. On restitution, the Court agreed that where the overpayment was caused by a breach of directly effective provision of Community law, the Community law principle of effectiveness overrides the interest provisions set out in the VATA 1994.

The Time Limit mistake and the Simple Interest mistake were held not to be relevant for the purposes of restitution, as they were not a mistake which led to the overpayment.

The Court said that the Appellant should not suffer as a result of a Liability Mistake, and that the Government should not profit from it under EU law. As such, taxpayers are entitled to compound interest on overpayments arising out of Liability Mistakes only.

On the issue of the time limits, any claim for restitution must be brought in the High Court within six years of the date that a diligent taxpayer would have known of the Liability Mistake. On that basis, the Court concluded the Appellants were out of time to make these restitution claims, as the relevant Liability Mistakes came to light over six years ago.

That date will be a question of fact; however, the starting point is likely to be a case which identified the relevant Liability Mistake. For example, the JP Morgan Claverhouse case identified a Liability Mistake in respect of fund management services provided to Investment Trust Companies. The deadline will, in most cases, start to run within days of the relevant judgment. Identifying the relevant judgment is more difficult where there has been a series of judgments going up through the UK courts and potentially to the ECJ. The first ruling in the taxpayer's favour on an issue of EU law may trigger the six-year time limit even where it was clear HMRC were appealing the matter.

Many Fleming claims are based on Liability Mistakes which came to light more than six years ago. Therefore, claimants will already be out of time to bring restitution claims on the basis of this judgment (although VAT Tribunal appeals may still be appropriate).

On the basis of the judgment, the Tax Chamber of the Tribunal could potentially determine that VATA 1994 s 78 or VATA 1994 s 80 can be interpreted consistently with the EU right to be restored to the position you would have been in, had the tax not been overpaid (i.e. that compound interest is due). You will have made claims to compound interest with your Fleming claims. Where these claims are rejected either implicitly (through the payment of simple interest only) or explicitly, in order to be certain that you are protected, you should appeal that decision to the tribunal.

The circumstances in which you need to bring a High Court restitution claim are now much clearer (albeit likely to be subject to appeal). As things stand, you should bring a claim in the High Court within six years of the case which identified the relevant Liability Mistake.

The Appellant is likely to appeal to the Court of Appeal on the time limits for bringing claims, and HMRC will probably do likewise in respect of their liability to pay compound interest.

Although this decision is a significant milestone, the case is far from over. The judgment will be appealed or cross-appealed, and the Court of Appeal may subsequently reverse some or all of the decision.

F J Chalke Ltd & A C Barnes (Wokingham) Ltd, High Court Chancery Division, 8 May 2009

Comment: If you have had a compound interest claim rejected by HMRC, you must appeal to the Tax Tribunal within 30 days of the rejection. You must also consider whether a High Court deadline is approaching, and if a claim is appropriate. Any such claims can either join or be stayed pending the final outcome of the VIC GLO case.

High Court says that online insurance introductions were exempt intermediary services

The High Court has given its decision in a joined case where both Appellants provide online introductory services between people seeking insurance and a panel of insurers.

The preceding Tribunal cases had produced contradictory answers on similar facts (Trader Media won its appeal, but InsuranceWide lost). The Court asked itself two questions. The first question was whether a taxpayer who merely introduced parties to each other, (sometimes not the insurer and the person seeking insurance), can be regarded as an insurance agent/broker. The second one was whether the Appellants’ activities comprised the exempt services of an insurance broker or agent acting as an insurance intermediary, as set out in UK law. Answering both questions in the affirmative, the court ruled the taxpayer services were exempt.

Insurancewide.com Services Ltd, High Court Chancery Division, 15 March 2009

Comment: Following this case, the dividing line between taxable advertising and exempt insurance intermediary services appears to have moved towards exemption.

High Court backs VAT Tribunal finding that taxpayers were aware of an MTIC fraud

Another joined case recently decided at the High Court, this time on MTIC fraud.

At Tribunal, HMRC successfully argued the Appellants knew the goods were involved in fraud, and that every transaction had as its objective, the defrauding of HMRC. As such, the Tribunal supported HMRC's decision to withhold the Appellants’ input tax repayment claims. In order to establish both the existence of fraud and the Appellants’ knowledge of it, the Tribunal considered various transactions in great detail. The Calltell and Opto Telelinks Tribunals were key cases for HMRC, as they were one of the first in which they successfully applied the ECJ decision in the ‘Kittel’ case.  In Kittel, the ECJ held that if a taxpayer knew, or should have known, that he was taking part in a transaction connected with VAT fraud, his input tax claim could be refused.

The Appellants’ appeal was that the Tribunal decision was based on two findings of fact that were not properly pleaded or supported with evidence. One finding was that the high volume, wholesale secondary mobile phone market was wholly or largely corrupt, and the other finding was that the owner of the two companies was guilty of fraud rather than having knowledge of the fraud.  Some secondary arguments were also made on the application of Kittel, and HMRC’s ability to recover more than the tax loss.

The Court backed the Tribunal’s finding of actual knowledge, and that the Appellants were well aware that they were dealing in fraudulent goods which were supplied for no other purpose. On the ‘test of knowledge’ the Court found that by being aware of VAT evasion in a chain, by making purchases, the purchaser makes himself an accomplice in that evasion. Thus, the appeals were dismissed. It also dismissed the argument that not all the input tax should be withheld, as the net revenue loss in relation to the goods is less than the input tax withheld.

Calltell Telecom Ltd & Opto Telelinks (Europe) Ltd, High Court Chancery Division, 21 May 2009

The above article is taken from VAT Voice, a bi-monthly publication from VAT Solutions (UK) Ltd. To subscribe to VAT Voice, visit TaxationWeb's Tax Bookshop (VAT Voice).