Constable VAT Consultancy LLP

Whilst this related primarily to written rulings, it was also possible to use this concession  following VAT inspections where it could be demonstrated that HMRC was aware of an incorrect accounting policy and  took no steps to correct it.  

Medical Protection Society Ltd (MPS)

HMRC issued MPS with a written VAT liability ruling confirming that legal services acquired from overseas lawyers on behalf of its members qualified for VAT exemption. However, when HMRC revisited the position they felt the full facts had not been disclosed and issued an assessment in excess of £5.8 million to correct the position. 

MPS appealed to the Tax Tribunal who found that the relevant disclosure requirement had not been met and held that MPS was liable to apply the reverse charge upholding the Commissioners’ assessment. 

 Boots Co PLC (Boots)

On 17 December last year the Court of Appeal held in the favour of HMRC on a similar basis to MPS. Boots corresponded with HMRC concerning face value vouchers and the VAT liability on purchase and redemption. After correspondence HMRC repaid a sum of VAT to Boots. However, HMRC withdrew the decision and sought to recover the majority of sums repaid. The Court of Appeal has agreed HMRC was within its rights to do so. 

Repayment made in ‘error’

An international recruitment consultancy submitted a claim to HMRC in 2003 seeking a repayment of VAT paid in error. Dialogue with HMRC continued for some time until the decision in the ‘Fleming’ case was announced. This decision confirmed that HMRC’s introduction of a three year cap on retrospective VAT refunds in 1996 and 1997 was illegal. As a result HMRC repaid £26.5 million (net of fees) plus statutory interest of £10.9 million, again net of fees. 

 In September 2009 HMRC advised the taxpayer that ‘HMRC have reviewed the recent payment and are now of the view that the claim in whole or in part should not have been paid. We have a duty to protect the revenue and are considering taking steps to recover the amounts overpaid. We apologise that a mistake has been made and wish to reassure you that HMRC are treating this as a matter of utmost importance and that every effort is being made to expediate matters. We are currently reviewing the details of the claim and will write to you shortly to explain our views in detail.’ 

The above information is in the public domain. What is not clear at this stage is whether or not HMRC has used an assessment to recover VAT repaid or what reasons HMRC decided to revisit the refunds made. A taxpayer should reasonably be able to expect that once a VAT refund is made that HMRC will not ask for its money back.

The circumstances surrounding this case does empasise a particular area of VAT legislation. HMRC has the power to raise assessments for VAT due within two years and this is not dependent upon new facts emerging. There may be a difference of opinion or interpretation of the legislation between HMRC officers which may result in previous agreements being reviewed by HMRC. 

Protecting your position in future 

Unfortunately the removal of ESC 3.5 and the refusal of the VAT Tribunal to hear cases involving an extra-statutory defence mean that it is very hard to obtain certainty. Keeping notes of meetings and telephone conversations with HMRC remains important but perhaps increasingly taxpayers will rely on non-statutory clearances which were introduced in April 2008 and are considered in detail below.

Non-statutory clearances

A non-statutory clearance is confirmation of HMRC’s view of the application of tax law to a specific transaction or event. HMRC will provide a clearance on VAT, regardless of the age of the legislation, where the taxpayer is able to demonstrate that:

• there is material uncertainty
• the issue is commercially significant.

• pre-transaction where evidence is supplied by the taxpayer that the transaction is genuinely contemplated; and,
• post-transaction.

• they reasonably relied upon the advice;
• where appropriate they made full disclosure of all the relevant facts; and
• the application of the statute would result in their financial detriment

Where this is the case, to apply the statute may be so unfair that it could amount to an abuse of power. Where HMRC have given an incorrect clearance, their primary duty will always remain to collect the correct amount of tax as required by the law. Therefore there will be some circumstances when they would not be bound by the advice HMRC given. However, where HMRC provide taxpayers with an erroneous opinion then provided that full facts were disclosed the stipulated clearance conditions were met then the taxpayer should only be required to start accounting for tax on the correct basis from the date of notification.

The main problem with the tax clearance system is cost and complexity. It is necessary to set out the facts, the potential interpretations of the facts and the law (including possible interpretations that are not helpful to the taxpayers’ case) and the reason for reaching a conclusion. This can be time consuming and expensive. However, tax clearances offer taxpayers a degree of protection where HMRC guidance and case law is ambiguous.

Whether a VAT clearance is appropriate will depend on many factors. However, for a complex matter that is not clearly covered by HMRC guidance, a clearance application is often our recommended approach following the withdrawal of ESC 3.5.  Our experience to date is that HMRC’s clearance team is professional and that clearances are dealt with by skilled officers who adopt a dispassionate evaluation of each case.  A significant advantage is that the taxpayer is able to present a well prepared argument to a reviewing officer who:

·          will usually understand the matter (many VAT inspectors are quick to raise  assessments without fully understanding a business/the relevant law);

·          is less likely to have a preconceived idea as to the correct outcome; and

·          is less interest in issuing an assessment than a VAT inspector who reviews a transaction that has not been cleared.