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A recent VAT tribunal case has emphasised the importance of ensuring that HMRC adhere to statutory time limits when collecting underdeclared or overclaimed VAT.

That was the outcome of the case won by Grant Thornton, leading financial and business adviser when representing a private healthcare provider in a VAT payment dispute.

The essence of the case dates back to 1997 when many operators of private hospitals entered into prepayment arrangements for drugs and prostheses. The intention was to militate against a future change in VAT liability which would have prevented the company from recovering VAT incurred on the purchase of these goods in the future.

"HMRC challenged the structure and began to review it through a series of inspections. However what HMRC failed to do in this instance was to abide by its own deadlines and as such did not issue the VAT assessment within the relevant statutory time limits. By failing to do this, although the substance of the assessment was correct in law, it was invalid", says Karen Robb, VAT Partner, Grant Thornton.

"The message is clear that taxpayers should be aware that time limits apply equally to HMRC and if assessments are not issued within the appropriate time limits, they will be time barred. Taxpayers should always review the timing of assessments, especially where there has been a protracted dispute," concludes Ms Robb.

The appropriate time limits for HMRC to issue a VAT assessment are 2 years after the end of the VAT period in which the error occurred, or 1 year after evidence of fact, sufficient in the opinion of HMRC to justify the issue of an assessment, comes to their knowledge, but in any case not more than 3 years after the end of the VAT period.

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