The issue was whether the appellant's claim to input tax of £793,797, being input tax incurred between 1 April 2001 and 31 October 2002, was excluded by the three-year cap under reg. 29(1A) of the Value Added Tax Regulations 1995 (SI 1995/2518).

In early 2001, Morgan Stanley Group (Europe) acquired the Quilter group of companies and the appellant brought the six companies into its VAT group. Quilter had been operating a partial exemption special method, but this was considered by the appellant and the commissioners to be unsophisticated and in need of change. In June 2001, the commissioners gave permission to the appellant by fax for the existing Quilter method to be used pending the implementation of a revised method, at which time any required adjustments could be made. In 2005, the appellant wrote to the commissioners proposing that a special method based on ‘headcount’ be used and that the method should apply to the Quilter companies from the time they entered its VAT group. A voluntary disclosure of underclaimed input tax in the previous three years was made by the appellant and this was duly paid. In 2006, the appellant made the further disputed voluntary disclosure claiming credit for underclaimed input tax incurred during the earlier period commencing on the date that the Quilter companies entered the appellant's VAT group and ending on 31 October 2002. The claim was rejected by the commissioners on the basis that it was not made within the statutory three-year time-limit.

The appellant contended that the terms of the permission given in the fax of June 2001 created a special method, either on the strength of the agreement or by virtue of the de facto conduct of the parties. The method contained both an interim recovery method and a provision for subsequent adjustment which applied irrespective of the three-year cap. Even if there had been no express agreement containing those terms and nothing operating as a de facto agreement, a special method of that type remained binding on the commissioners as the exercise of their powers of care and management. In the appellant's view, the absence of any mention of a three-year cap in the initial agreement stopped the commissioners from relying on reg. 29(1 A).

The commissioners argued that the fax of June 2001 produced no special method, by agreement or otherwise. In so far as any special method existed before the end of 2005, it was the old Quilter method which continued by conduct of the parties. There was nothing in the agreement to displace the three-year cap.

The tribunal dismissed the taxpayer's appeal.

1. From the evidence, there was no express agreement at the time of admission of the Quilter companies to the appellant's VAT group for the adoption of a special method. What was agreed was a framework for a ‘caretaker’ special method which was designed to last until the formal agreement of a special method.
2. The words of the June 2001 fax, together with the conduct of the parties, were sufficiently clear and unambiguous to amount to a special method with a provision for adjustment being an integral part of the caretaker special method.
3. There was no indication in the wording of reg. 29(1A) that its operation did not extend to partial exemption. Neither was there any indication in the 2001 agreement that the commissioners were proposing that the continued use of the existing method should override the legislation setting time limits for recovery of VAT.
4. To the extent that the agreement set out in the fax of June 2001 could be read in any way as waiving the three-year cap, that possibility was rendered ineffective by the wording of reg. 29(1A).
5. The commissioners' decision to refuse the disputed input tax claim was upheld.

No. 20,424