Following the House of Lords landmark judgment in the Conde Nast Publications Limited v. HMRC case earlier this year, H M Revenue & Customs is now believed to be facing a potential rush of claims for VAT refunds now reclaimable which is considered to potentially exceed £1 billion.
In June 2003 Conde Nast launched a claim in respect of deductions of input VAT previously paid on staff entertaining which they had previously failed to deduct dating back to 1973. HMRC refused to refund the majority of the VAT overpaid between 1973 and 2003 on the basis of a three year cap on VAT claims introduced in 1997. HMRC submitted successfully before the Commissioners and the High Court that this cap prevented any reclaiming of overpaid VAT prior to 2000. The three year limitation period had been introduced under Regulation 29 of the Value Added Tax Regulations 1995.
Fundamentally however, at the time of the introduction of these regulations no transitional period was provided for. The argument, which finally succeeded before the Court of Appeal, despite the Court’s reluctance, was that the three-year time limit introduced without a transitional period was incompatible with the principles of European Union Law. European Union Law states that any such change in the UK Law must make provision for a reasonable transitional period to allow any persons with a possible claim time to make that claim. By contrast the Regulations merely barred people with claims potentially dating back to 1973 from making them, with immediate effect.
In delivering one of the Judgments in the House of Lords, Lord Craighead, said: “to be compatible with EU Law, the taxpayers were entitled to be told in advance of any transitional arrangements that would enable them to submit the late claims … despite the introduction of the time limit. Taxpayers were entitled to be given sufficient notice to familiarise themselves with the new regime including the period of grace that was to be allowed to the submission of group claims during the transitional period.”
This is a landmark decision and one with potentially wide ranging consequences. Certainly it is possible that the floodgates will in due course open to previously unconsidered claims for repayment of VAT as tax payers subject to review their previous VAT payments in light of this decision.
HMRC has immediately moved to minimise its exposure. They have immediately issued a Revenue & Customs brief stating that they consider not only that claims may now be made for input tax in respect of which entitlement to deduct arose in accounting periods ending before 1 May 1997 but also; output tax overpaid or over declared in accounting periods ending before 4 December 1996.
Further HMRC have now confirmed that claims will be paid, following verification, without the need to provide an undertaking to repay HMRC, as had previously been the case prior to the House of Lords judgment. Those who had their claims paid on condition that they provided an undertaking to repay in the event that the House of Lords had found in favour of HMRC have been released from those undertakings.
All businesses and financial advisors must now surely take an urgent look at the status of their previous VAT payments and declarations and consider the possibility of any claim. HMRC whilst obviously having had in place plans to deal with this judgment will count the cost of the House of Lords decision and are due to make a further announcement on this case in due course.
