HMRC Business Brief 13/06

24 Aug 2006 02:45 PM

Contents:
1. VAT: 3-Year Cap on making claims - Court of Appeal Judgment in Michael Fleming t/a Bodycraft
2. VAT: 3-Year Cap on making claims - Court of Appeal Judgment in Conde Nast Publications Ltd

1. VAT: 3-YEAR CAP ON MAKING CLAIMS - COURT OF APPEAL JUDGMENT IN MICHAEL FLEMING T/A BODYCRAFT

This Business Brief article explains HM Revenue & Customs' (HMRC) position following the judgment of the Court of Appeal in Michael Fleming (t/a Bodycraft) -v- CRC (Conde Nast Publications Ltd intervening) [2006] EWCA Civ 70; [2006] STC 864; [2006] All ER (D) 199 (Feb) (Fleming). The court decided the case against HMRC but has granted permission to appeal to the House of Lords and HMRC are doing so.

Pending the outcome of the appeal to the House of Lords, HMRC will give effect to the Court of Appeal's judgment for those who wish to make a claim, under the terms of this Business Brief, which includes a requirement to repay, with interest, in the event that this judgment is overturned. Many taxpayers may choose to await the final outcome of the litigation. In either event, claims arising out of this litigation will carry an entitlement to make a claim for statutory, simple interest (under section 78 of the VAT Act 1994).

Background
In 1996 and 1997, the Government introduced a 3-year limitation period on claims for repayment of overpaid VAT, the correction of errors and late claims to input tax. It is now accepted, following the ECJ's judgment in Marks & Spencer Plc -v- CCE [2002] STC 1036 (M&S), that the statutory 3-year limitation periods (introduced with no express transitional periods during which taxpayers were able to make claims under the pre-existing rules) were, in certain cases, wrongly relied upon by HMRC against taxpayers.

Business Brief 22/02 invited claims under section 80 of the VAT Act 1994 for repayment of amounts paid incorrectly as VAT. Taxpayers were not, at that time, invited to submit or re-submit claims which had, or would have, been subject to the capping measures introduced, for example in regulation 29(1A) of the VAT Regulations 1995, with effect from 1 May 1997.

The exclusion of claims (particularly those made under regulation 29 of the VAT Regulations 1995 (input tax)) from the scope of Business Brief 22/02, and the refusal of claims made in accordance with it, led to a number of appeals to the VAT & Duties Tribunal challenging both the manner in which the relevant 3-year limitation periods were enacted and HMRC's response to the M&S judgment. Many of these appeals were decided in favour of HMRC but the Court of Appeal in Fleming found against them and held that persons whose right to deduct input tax arose before the date on which the new time limit was enacted, that is to say before 1 May 1997, should be allowed to claim without imposition of the 3-year cap.

Implications of the Fleming judgment
The Court of Appeal's judgment has implications beyond late claims for input tax. HMRC accept, for present purposes, that any claim, under regulations 29, 34 or 35 of the VAT Regulations 1995, or section 80 of the VAT Act 1994, arising before the enactment of the respective capping measures, is effectively uncapped. However, this does not mean that the 3-year time limits, as they operate currently since the date of their enactment, are themselves contrary to Community law or in any sense invalid.

Making a Claim
Taxpayers who believe that they are entitled to benefit from the Court of Appeal's judgment in Fleming, and who wish to claim without waiting until the matter is finally determined in the House of Lords, should proceed as follows:

Where a claim, relating to an event more than three years earlier, has already been made and remains 'active', either because no appealable decision has yet been given by HMRC or because the matter is subject to appeal, taxpayers should write to HMRC (see the address below) asking for their claim to be considered in accordance with this Business Brief.

In all other cases, a fresh claim can be made where an amount: * has been improperly paid as VAT before 4 December 1996; or * has been overdeclared as output tax in an accounting period ending before 4 December 1996; or
* became deductible as input tax on or before 30 April 1997 and has not yet been deducted.

In all cases, the claimant must sign an undertaking to the effect that, if the ultimate determination of litigation removes his entitlement, any credit given, or money paid, to him, will be returned to HMRC with interest. A copy of the undertaking is provided at the Annexe.

Claims falling within the scope of section 80 of the VAT Act 1994 will be paid only where HMRC are satisfied that to pay the claim will not result in the unjust enrichment of the claimant.

Form of claim
New claims must be made in writing and must include:
* a statement of the amount being claimed;
* the reason for the claim;
* the method of calculation in as much detail as possible; * the prescribed accounting periods in respect of which claims are being made, allocating amounts to periods;
* the dates on which any overpayments, overdeclarations or underclaims were made and, if the overpayment was made pursuant to an assessment or voluntary disclosure, the date on which the assessment or disclosure was made;
* copies of all documents, schedules, etc. used in support of the claim;
* the reasons why you will not be unjustly enriched, where appropriate, if a credit is now given or a repayment made; * any claim for statutory, simple interest (under section 78 of the VAT Act 1994) that you consider you are entitled to make.

Claims (whether made under section 80 of the VAT Act 1994 or under regulation 29 of the VAT Regulations 1995) will only be paid or credited on a net basis. For example, if you overdeclared output tax during a given accounting period on supplies which ought to have been exempt, and in the same accounting period you recovered more input tax than you ought, the input tax wrongly recovered will be set off against the overdeclared output tax and only the balance will be paid or credited. Conversely, if, in a given accounting period you have understated your input tax entitlement but you have also understated your output tax liability, your claim should be for any net credit due.

All claims are to be sent to the Voluntary Disclosure Team at: HM Revenue & Customs
'Fleming' Claims Team (Leeds)
Queens Dock
Liverpool
Merseyside, L74 4AA

Telephone enquiries in relation to the submission of claims or to claims that have already been submitted to the Claims Team may be made on 0113 389 4432.

2. VAT: 3-YEAR CAP ON MAKING CLAIMS - COURT OF APPEAL JUDGMENT IN CONDE NAST PUBLICATIONS LTD

This Business Brief article explains HM Revenue & Customs' (HMRC) position following the Court of Appeal judgment in Conde Nast Publications Ltd -v- CRC [2006] EWCA Civ 976 (Conde Nast).

Taxpayers need take no action as a consequence of this article. Any taxpayer who is likely to benefit from the Court of Appeal's judgment in Conde Nast will benefit from its judgment in Fleming and can lodge, or pursue, a claim as explained in the previous article in this Business Brief.

Like Fleming, Conde Nast concerned claims refused by HMRC on the basis that they were capped by a 3-year limitation period that, it is now accepted, should have been introduced with an express transitional period during which taxpayers ought to have been able to make claims under the pre-existing rules.

The Court of Appeal hearing Conde Nast was bound by, and followed, its majority judgment in Fleming and disposed of the appeal on that basis. However, the Conde Nast litigation raises an important issue not present on the facts of the Fleming case.

HMRC's view is that, in the absence of a transitional period expressly provided for in legislation, the capping provisions should only be disapplied to the extent necessary to give effect to a taxpayer's Community law rights, where, in individual cases, it was made impossible to exercise those rights by the manner in which the cap was introduced.

It should not be disapplied generally in respect of all claims arising before the capping legislation as was decided by the Court of Appeal. Consequently, HMRC argue that, if a taxpayer would not have put in a claim even had a transitional period been provided when the cap was introduced, the absence of a transitional period cannot be said to have infringed his Community law rights by preventing him from making his claim and the 3-year time limit should not be disapplied.

The Court of Appeal decided this point against HMRC. As it has significance in the event that the House of Lords overturns the judgment in Fleming, HMRC have now petitioned their Lordships for leave to appeal against the Court of Appeal's judgment in Conde Nast.

Further information
For further information and advice, please contact HM Revenue & Customs' National Advice Service on 0845 010 9000.

The views expressed in this Business Brief are those of HM Revenue & Customs.

GENERAL ENQUIRIES:

For general enquiries please contact HM Revenue & Customs' National Advice Service on 0845 010 9000.

This release and other information about HM Revenue & Customs can be found at our website: www.hmrc.gov.uk

Annexe
Undertaking to repay VAT and statutory interest
The Commissioners for HM Revenue and Customs ("the Commissioners") agree to credit the account of [ ] ("the Claimant") with the principal sum of VAT of £ [ ] without the need for any further court action by the Claimant. If that results in the Commissioners owing a net sum to the Claimant then the Commissioners agree to pay that net sum to the Claimant [with the appropriate amount of statutory interest].

In return, the Claimant agrees that, if the effect of the decision of the courts, in Michael Fleming (t/a Bodycraft) v. HMRC [2006] EWCA Civ 70, Conde Nast Publications Limited v. HMRC [2006] EWCA Civ 976 or any other case, is that the Claimant was not entitled to the credit described above (or any part of the credit), the credit (or part of the credit) will be cancelled and the Claimant will repay all or the appropriate part of any net sum and statutory interest paid to it by the Commissioners.

The Claimant also agrees to pay simple interest, at the rate set under section 197 of the Finance Act 1996, on any net sum and statutory interest repaid from the date it is paid to the Claimant by the Commissioners to the date it is repaid to the Commissioners.

The Claimant agrees to make the repayments described above, and pay interest thereon, within 28 days of a demand being made by the Commissioners.

Signed:

For the Commissioners for Her Majesty's Revenue & Customs

Name:

Signature:

Date:

For the Claimant

Name:

Signature:

Date:

Business Brief
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