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Paddy Behan provides a timely and topical view on VAT repayment claims, following a recent House of Lords decision. 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.

The Background

Most VAT registered businesses will know that, generally, a three-year time limit applies to claims for repayment of VAT overpaid.  [But see above comment]. However, the way that this time limit was introduced breached Community law by failing to allow a transitional period.  As a result, since the decision of the European Court of Justice in Marks and Spencer in July, 2002, it has been clear that HMRC cannot enforce this time limit in all cases.  Until last month there was a huge degree of uncertainty, most of which has now been cleared away.

In 2003, HMRC published two Business Briefs, which purported to allow a retrospective transitional period.  Under this administrative arrangement hundreds of businesses got very large repayments, plus interest.  Repayment claims went back to 1 April, 1973 or the establishment of the business if later.  Initially claims covered periods to 4 December, 2006; it is now clear that input tax claims can go up to 1 May, 1997.   

HMRC refused claims in any case in which they thought the taxpayer did not know of the overpayment back in 1996/1997 or would probably not have made a claim, even if a transitional period had been allowed for catch up claims (the “could have/would have” argument).  They also tried to enforce 30 June, 2003, as the last date for the receipt of back claims covering 1973 to 1996/1997.

HMRC’s views both in relation to time limits and the “could have/would have” argument have been rejected: it is open season on VAT repayment claims.

Recent developments: the widening of the opportunity

On 23 January, the House of Lords gave its decision in the joined cases Fleming (t/a Bodycraft) and Condé Nast.  For our clients, introducers and contacts the relevant points coming out of the decision are:

• HMRC’s attempts to impose a deadline by publishing Business Briefs has failed; they will now have to allow a real transitional period (expect an announcement in the Budget on legislation to bring in a fully effective time limit and the date on which the opportunity to make catch up claims will end),
• claims refused or delayed on the basis of the “could have/would have” argument will now have to be paid and
• completely new claims can be put in now.

The opportunity covers the whole of the VAT system

Every client, introducer and contact should focus on this issue urgently, noting the following points:

• any business that made any type of overpayment, at any time between 1 April, 1973 and  4 December, 1996, In relation to output tax and 1 May, 1997, in relation to input tax has a potential claim, even if they have not yet taken any action,
• this includes cases of pure taxpayer error; just in relation to pure error HMRC may have some arguments to limit claims but most claims can be presented in a way that should secure repayments going back to 1973 or the start of the business,
• the most familiar source of claims is in the retail motor sector where, virtually without exception, VAT was overdeclared on sales of demonstrator vehicles and on manufacturers’ bonuses,

Virtually every motor dealership that traded at any time between 1 April 1973 and 1996/97 has a claim.

• in relation to motor dealers the following should be noted:
• many claims that have already been paid can be revisited and increased and
• claims that have been refused or stalled by HMRC can now be freed up,
• a case to be heard in early March may result in the class of potential claimants becoming even wider,
• claimants do not need full records; estimates produced on a sound basis should result in repayments being made,
• group litigation just starting up may establish a right to compound interest in due course and
• there is an argument that repayments are not subject to income tax or corporation tax.

Why is this topical now?

On 20 February HMRC published Revenue & Customs Brief 07/08 giving their initial reaction to the House of Lords decision in Fleming (t/a Bodycraft) and Condé Nast.  This confirms that repayment claims can be made in respect of:

• output tax overpaid up to 4 December, 1996, and
• input tax under claimed up to 1 May, 1997.

Claims are to be sent to:

HM Revenue & Customs
“Fleming” Claims Team (Leeds)
Queens Dock
Liverpool
Merseyside
L74 4AA.

Is there really an opportunity left?  Haven’t the big firms exhausted the market? 

There is a huge untapped reservoir of repayment claims.  This opportunity can be exploited by high street accountants as easily as the huge international firms.  Indeed, many of the claims missed since 2002 can only be identified by advisers who are close to their clients.  Many claims will not be picked up by a firm that uses conveyor belt-style techniques to mass market a claims service.

Any VAT overpayment, of any kind, in any relevant period, should be considered as a potential repayment claim.

What claims have been missed?

The most obvious place to start is with simple accounting errors. 

Any amount that could have been claimed immediately before the announcement of the three-year time limit can be claimed now. 

Many businesses which had long-running overpayments – for instance, because of accounting or software errors – have been put off making claims because they believed that their claims would fail the “could have/would have” test.  The House of Lords decision has completely rejected this test. 

In relation to motor dealerships many retired dealer principals, or their successors, are still “sitting on” claims they do not know they have. Similarly, IPs should recognise that claims may be an asset of the business to which they are appointed.

Anyone who sold out a dealership that traded at any time between 1 April, 1973, and 4 December, 1996, or 1 May, 1997, as appropriate, has a claim.  In this connection the fact that a company may have been struck off need not stop a successful claim.  Those who have inherited from dealer principals may have completely ignored the possibility of claiming.

It may be possible to claim for dormant companies.

If the company can be restored to the register, it is enough that steps to do so are started in order to maintain a claim; i.e. the company does not have to be restored to the register before action can be taken.  There may even be a further liberalisation in HMRC’s policy on this point in the near future.

Claims already paid to dealerships that sold Mercedes, BMW, Volvo and certain other marques can be revisited and many can be increased.

Some motor dealers that have already put in claims may have been put off claiming repayments by earlier HMRC statements (now shown to have been wrong) that repayments were not due in relation to bonuses paid by means of a credit note, as opposed to a self bill invoice.  During 2007, HMRC changed their stance and made many additional repayments.  But some claims have yet to be corrected. 

There is no downside to making a claim.

The retail motor industry, has been subject to radical consolidation in the market at various times.  Groups bought out smaller dealers, hived up the trade and struck off the now dormant companies.  It was widely assumed that the right to VAT repayments died with the dormant companies.  This is being challenged in Midland Co-operative Society Ltd v HMRC, which will be heard by the Court of Appeal in early March.  The taxpayer won in the High Court and, if the decision survives HMRC’s appeal, many existing businesses that made claims already will be able to increase them by adding in claims by continuing companies in relation to the trading of struck off companies.

Purchasers of dealerships may benefit from claims in respect of businesses they purchased.

Are claims difficult to prepare?

As a matter of law, HMRC are obliged not to make it unduly difficult to claim.  This means that they must act fairly on the basis of what records are actually in existence.  They cannot insist on the production of records that the claimant is not obliged to keep.  Most businesses will have few records from the relevant periods and some will have none at all.  But advisers experienced in this area can extrapolate estimated claims, which should satisfy HMRC, even from records dating from after the relevant period.

Will repayments attract interest?

All repayments should attract some interest and many will bear interest covering the whole of the period.  HMRC will pay simple interest at the statutory rate.  Even simple interest will be more than the VAT itself in most cases where the claim goes back to 1973. 

Claimants and their advisers should also consider carefully the potential to make protective claims for compound interest following the decision of the House of Lords in Sempra Metals.  A group litigation order has been issued in a case seeking to apply this decision to VAT repayments.

The potential to claim compound interest on repayments should be protected, at least with a protective claim.  Compound interest, if eventually paid, could be a multiple of the total claim.

Will the opportunity last forever?

The Revenue & Customs Brief says that there will a further announcement in due course.  We therefore expect that HMRC will announce legislation to remedy the breach of Community law that prevents the three-year time limit having full effect.  A likely date for an announcement is Budget day, 12 March.  On balance we expect that a reasonable period will be allowed for “catch up claims”.  However, we advise that it would be prudent at least to begin preparing claims or to instruct an adviser before that date, and to keep documentary evidence of the fact. [Please see above comment following the release of the Budget Day 2008 Notes]

Prompt action is advisable to protect repayment rights and to get into the system ahead of the rush.

What about corporation tax/income tax?

HMRC take the view that repayments are subject to corporation tax or income tax.  Some advisers believe that there is a respectable argument that the repayments should not be subject to tax at all.  The chances of advancing this argument may be sensitive to the accounting treatment and specialist advice should be taken on this point. 

There is a respectable argument that repayments are tax free.

Paddy Behan
Mercury Tax Group

About Mercury Tax Group

The Mercury Tax Group indirect tax practice has specific experience in the above area. The Mercury Team has a long track record and can work along side accountants to put them on an equal footing with any of their competitors. Mercury Tax Group can also help those who wish to joint the group litigation.

What if these cases are outside my firm’s areas of expertise?

Mercury Tax Group offers a service to support accountants and tax advisers in cases like this.  This is headed by Paddy Behan who has been extensively involved in time limit issues even since the run up to the Marks and Spencer decision in July 2002, which started the repayment campaign.  The Mercury offering includes an initial fixed fee file review for £750 plus VAT.  For this Mercury will:

* review the file,
* comment on the state of play if it relates to a claim made but still outstanding,
* advise on prospects for success if no claim has been made,
* outline actions required to get a repayment and
* advise on compound interest claims.

After that, if the adviser or the business itself wishes to take the matter further, Mercury Tax Group will help to:

* formulate a claim,
* negotiate with HMRC and
* protect the position in relation to compound interest.

When working with fellow advisers, Mercury Tax Group will be prepared to act on the basis of a success fee split equitably between the adviser and Mercury.

Mercury Tax Group can help any business that wants to dispute a tax liability on repayments.