This month’s Chartered Accountants Tax Case Digest looks at a case which examined a claim for repayment of overpaid output tax and whether a claim can be amended by complete substitution of reasons.

Background

In 2007 Vodafone Group Services Limited (“Vodafone”), wrote to the appellants, HMRC, to make a voluntary disclosure. Vodafone’s letter requested a repayment of over £4 million in overpaid output tax in its VAT returns for the periods 01/04 to 01/06. The letter stated that the over-payment resulted from Vodafone’s participation in the Nectar card scheme, and its failure to take into account the cost of Nectar points awarded to its customers when calculating its output tax liabilities.

HMRC did not agree that there was any over-declaration of output tax for this reason and they rejected the claim. That claim (“the Nectar claim”) remains outstanding, and was the subject of an appeal, submitted to the VAT and Duties Tribunal and thereafter the First-tier Tribunal (“the FTT”).

Between 2009 and 2011 Vodafone made several more voluntary disclosures, some of which included claims for the repayment of further output tax which it had over-declared in accounting periods including those covered by the Nectar claim. Those over-declarations were not connected with the Nectar card scheme, but were attributable to other accounting errors.

HMRC agreed that the output tax included in these declarations was overpaid, and they repaid some of it, or offset it against an assessment for output tax which Vodafone should have accounted for.

HMRC refused to pay the remainder of the sums claimed in the 2009, 2010 and 2011 voluntary disclosures, including all of those relating to the periods 01/04 to 01/06 (“the later claims”), because they were made after the expiry of the relevant time limit. In consequence, HMRC argued that the later claims failed, regardless of their merits.

Vodafone accepted that had the later claims been freestanding, this would be so. But it argued that it is permissible to amend the Nectar claim, which, as HMRC accepted, was made in time. It therefore argued that the Nectar claim encompassesed the 35 later claims instead.

Vodafone did not abandon the Nectar claim, but was willing to forego it and accept instead the same amount of money but upon the different grounds supporting the later claims. The amount attributable to the later claims for the periods 01/04 to 01/06 exceeded the value of the Nectar claim, but Vodafone did not contend that it should have recovered more than the amount of that claim.

HMRC disputed Vodafone’s argument, and said that while it is permissible to amend a claim, it is not permissible to do as Vodafone had done which amounted to replacing one claim with another.

In order to resolve the difference between the parties it was agreed that the FTT should determine, within the appeal against HMRC’s rejection of the Nectar claim, a preliminary issue which was as follows:

“In circumstances where a VAT-registered taxpayer has submitted a claim for a sum of money in a VAT period, in accordance with the time limits set out in s 80 of the Value Added Tax Act 1994 (‘VATA’), can the taxpayer maintain the quantum of the claim, but vary the methodology by which the claim is calculated (for example by substituting a different reason for claiming an identical or lower amount) after the expiry of the time limits set out in s 80 of VATA but while the claim remains unresolved?”

HMRC’s view was that although a claim could be amended after submission, the law did not permit one claim to be replaced with another, based on completely different reasons, in a case where the relevant periods had in the interim gone out of time. The underlying facts of a claim must remain the same, otherwise an amended claim is actually a new claim and not an amendment of the original claim.

While accepting that an overpayment had been made, HMRC considered the approach by the FTT to be a breach of the legal certainty that the UK time limit imposed.

This preliminary issue duly came before the FTT who determined it in Vodafone’s favour. HMRC appealed, with permission, to the UTT.

Decision

The relevant legislation is in section 80 of VATA 1994 which contains an exhaustive code for the making of claims for the recovery of over-paid output tax. That section read as follows at the time of the Nectar claim

“(1) Where a person— (a) has accounted to the Commissioners for VAT for a prescribed accounting period (whenever ended), and (b) in doing so, has brought into account as output tax an amount that was not output tax due, the Commissioners shall be liable to credit the person with that amount …

(2) The Commissioners shall only be liable to credit or repay an amount under this section on a claim being made for the purpose …

(4) The Commissioners shall not be liable on a claim under this section— (a) to credit an amount to a person under subsection (1) … above … if the claim is made more than 3 years after the relevant date …

(4ZA)the relevant date is— (a) in the case of a claim by virtue of subsection (1) above, the end 30 of the prescribed accounting period mentioned in that subsection …

(6) A claim under this section shall be made in such form and manner and shall be supported by such documentary evidence as the Commissioners prescribe by regulations; and regulations under this subsection may make different provision for different cases.

(7) Except as provided by this section, the Commissioners shall not be liable to credit or repay any amount accounted for or paid to them by way of VAT that was not VAT due to them.”

There have been subsequent amendments to that section but, save for the extension of the time limit from three years to four, none was relevant here. The regulations to which sub-s (6) refers are the Value Added Tax Regulations 1995 (SI 1995/2518), regulation 37 of which provides:

“A claim under section 80 of the Act shall be made in writing to the Commissioners and shall, by reference to such documentary evidence as is in the possession of the claimant, state the amount of the claim and the method by which that amount was calculated.”

The UT looked at the elements of a claim. A section 80 claim is for a sum of money related to particular transactions in respect of which VAT has been accounted for but is not due. Therefore, a claim made for one reason cannot be subsumed into a claim made for another reason as both claims relate to different transactions.

The UT then went on to consider the regulations that govern the making of claims. A claim is not defined by its amount alone but also by the method of its calculation. It is not reasonable to conclude, as the FTT had, that the amount cannot be increased while at the same time saying that the method by which the amount is calculated can be changed at will while the claim remains open.

A claim can be increased to correct errors and omissions, but its scope cannot be enlarged by including new elements or by changing the basis / subject matter of the claim completely. To do so would circumvent the cap. HMRC’s appeal was allowed.

The full judgment in this case is available from http://www.tribunals.gov.uk/financeandtax/Documents/decisions/hmrc-v-vodaphone.pdf