Most taxpayers’ VAT records contain inadvertent errors. This could be due to something as simple as a purchase invoice being received late, or to something more significant, like an HMRC policy error. The impact of these errors is limited by a “cap”.
Time limits in Sections 77 & 80, VAT Act 1994 prevent both HMRC and taxpayers from correcting VAT errors in the distant past. In practice, this cap restricts a taxpayer’s ability to claim VAT refunds resulting from old errors, whilst also restricting HMRC’s ability to assess a taxpayer for VAT liabilities resulting from old errors. Currently the cap is set at four years.
The cap’s importance for taxpayers is illustrated by three recent cases:
- Anthony Geller v Revenue and Customs Commissioners ( UKFTT 123, published on 5 March 2013)
- Edith Dianne Hitchen v Revenue and Customs Commissioners ( UKFTT 149, published on 1 March 2013)
- Birmingham Hippodrome Theatre Trust Ltd v Revenue and Customs Commissioners ( UKUT 057, published on 19 February 2013)
No “Reasonable Excuse” Test
The Anthony Geller case is the simplest. The taxpayer tried to recover VAT from HMRC arising from errors more than 4 years earlier. He explained the difficulties he had experienced as a justification for removing the cap.
The Tribunal rejected the taxpayer’s argument. It noted that there was no “reasonable excuse” test when considering whether the cap should apply.
The 2009 Time-Limit Extension
In the case of Edith Dianne Hitchen, the taxpayer failed to submit VAT returns in 2002, received an assessment from HMRC in January 2005 and submitted the missing returns in February 2009. The taxpayer claimed the difference between the actual liabilities in the VAT returns and the (higher) assessments. Although seven years late, the taxpayer argued that the returns had been submitted within four years of the assessments and were therefore not limited by the four year cap.
The Tribunal noted that the cap had only been extended to four years with effect from 1 April 2009. Previously the cap had been three years. The VAT returns had been submitted after the relevant three year cap had expired and the taxpayer’s claim was therefore rejected.
Since 1979 the Birmingham Hippodrome Theatre Trust Ltd’s ticket sales had been treated as taxable by HMRC. It was later found that these supplies should have been exempt under European VAT law.
The taxpayer claimed from HMRC the output VAT previously charged in error. However, the taxpayer had also claimed the input VAT related to its then-taxable supplies. As those supplies were now considered to be exempt, the taxpayer was no longer entitled to its claim for the related input VAT.
Usually the cap would apply to both HMRC and the taxpayer, limiting claims and assessments equally. However, in a series of cases between 2002 and 2006, the courts ruled that the rapid introduction of the three year cap in 1996 had not provided a sufficient transition period for taxpayers. Therefore, until 31 March 2009, taxpayers were entitled to claim VAT refunds arising from errors prior to the 1996 capping provisions.
As a result, the Birmingham Hippodrome Theatre Trust Ltd could make claims relating to this period, but the capping provisions continued to prevent HMRC from raising an assessment to claw back related input VAT.
The Upper Tribunal considered Article 81(3A), VAT Act 1994. This law permits HMRC to ignore the capping provisions and to offset out-of-time VAT debits (e.g. input VAT which was not repayable) against out-of-time VAT credits (e.g. overpaid output VAT), where the VAT credits and debits were both triggered by the same mistake (e.g. treating theatre services as taxable instead of exempt).
The Tribunal ruled that HMRC was entitled to reduce the taxpayer’s claim to nil.
It is important for taxpayers and practitioners to be aware of the VAT cap, as it can be helpful in limiting the damage caused by old VAT errors but also detrimental when trying to recover lost VAT.
Capping issues can become complex and a further example of this relates to VAT registrations. Recovery of input VAT incurred prior to VAT registration is permitted subject to certain restrictions, including time limits. However, the time limits for recovering this input VAT are different from the standard cap, which in turn has implications for the preferred effective date of registration requested in the VAT registration form. Careful consideration of capping rules is therefore required even before applying for VAT registration.