VAT is not a simple tax. There are many complex areas where it is difficult to determine the correct VAT liability or claim amount. To obtain clarity, it is often necessary to enter into discussion with HMRC and to reach an agreement as to what should be done in practice.
Whilst such an agreement might provide clarity to a taxpayer, businesses will also want certainty. This certainty is lacking if HMRC later overturns the agreement with retrospective effect. The question of whether such an agreement with HMRC would be legally enforceable against HMRC was considered in the case of Southern Cross Employment Agency Ltd v Revenue and Customs Commissioners ( UKUT 122, published on 17 April 2015).
The taxpayer was an employment agency supplying dental nurses to dentists. HMRC agreed with the taxpayer that its previous supplies were exempt. In 2009, after some discussion regarding unjust enrichment, agreement was reached for a repayment of 74% of the VAT claimed (nearly £1.4m).
HMRC later stated that the taxpayer’s supplies of staff were not exempt as care or medical care. Despite the agreement previously reached, HMRC attempted to claw back the £1.4m which had already been paid to the taxpayer. HMRC claimed that it had not entered into an agreement on the facts and in any case such an agreement would be ultra vires.
The Upper Tribunal (UT) confirmed the decision of the First-tier Tribunal in favour of the taxpayer and said the agreement was valid. The power for HMRC to conclude agreements exists in Section 85, VAT Act 1994 when an appeal is in process. The UT further found that HMRC had the power to enter agreements with taxpayers for VAT purposes even when there is not an appeal in hand.
This is an important decision. VAT is frequently far from clear and it is a practical necessity for taxpayers to be able to discuss and agree such issues with HMRC. For businesses it is particularly important to be clear and certain as to their VAT position, and it is a welcome judgment that such agreements with HMRC can be agreed legally and enforced in law.
For further information and help on discussions and disputes with HMRC, please contact the TaxDesk on 0845 4900 509 and ask for Kevin Hall.