The House of Lords has today upheld a ruling by the Court of Appeal that the UK Government’s introduction of a three year time limit on filing claims for overpaid VAT is defective without transitional provisions.

The dismissal of an appeal brought by HM Revenue & Customs against VAT claims made by Condé Nast Publications Ltd (CNP) and Michael Fleming means that businesses can now claim back under-recovered VAT which they failed to file before the Government introduced a new and much shorter time limit for reclaiming overpaid VAT in late 1996. 

Tony McClenaghan, head of indirect tax at Deloitte, which acted for CNP, said: “Our client sought to recover VAT on travel and subsistence expenses which it had incurred and which was properly deductible. However, when HMRC introduced the three year cap it refused to repay the VAT which CNP was entitled to recover.

“The successful culmination of the litigation means that CNP will finally receive the VAT which it is lawfully entitled to and clearly this ruling has implications for other businesses.”

Ends

Notes to editors

Background and context to case
On 4 December 1996, the Government first introduced a new three year time limit for reclaiming VAT over declared on sales (output tax).  This was introduced with retrospective effect and without any transitional arrangements to allow taxpayers to correct earlier errors on their VAT returns.

A few months later, on 1 May 1997, a further three year limitation period was introduced with immediate and retrospective effect for VAT on business costs (input tax).  Before this date there was no time limit.

The problem with this legislation was that if, for example, a business paid £100 of VAT to a supplier on 1 January 1990 it would have been entitled to claim a refund of the VAT from HMRC at that time.  However, if it failed to do so, HMRC had not previously imposed any time limit for making the claim at a later date.  By the time of the new regimes, introduced on 4 December 1996 and then 1 May 1997, HMRC maintained that the new law allowed them to block any such claim made after these dates, because it would have been made more than 3 years late. 

Deloitte acted for Marks and Spencer in taking a case to the ECJ to challenge the initial December 1996 legislation.  Marks and Spencer were successful and the ECJ declared that it was unlawful for the UK to introduce the new time limit without any transitional periods.

In response to this HMRC announced in 2002 that they would allow certain claims to be made back to 1973 if businesses could show that they would have made a claim had there been a transitional period incorporated with the new 1996 legislation.  In the light of this announcement, CNP brought its claim for VAT costs on staff entertainment going back to 1973, which it was entitled to but had not previously claimed.  HMRC refused to pay out as it was a claim for input tax and not output tax. HMRC argued that the three year limit imposed for such claims on 1 May 1997 defeated CNP’s claim and that the Marks and Spencer decision did not apply to this later legislation even though it was drafted in similar terms to the 4 December 1996 legislation.

Their Lordships, following the case law of the ECJ in the Marks and Spencer case, have held that although the Government may impose a three year time limit, it cannot introduce it without allowing taxpayers a reasonable time to check their records and to claim input tax which they were entitled to claim before 1 May 1997 but had not yet done so.  The House of Lords has now ruled that HMRC were not entitled to block this type of claim and should prospectively legislate for a specific transitional period to allow claims to be made for overpaid VAT incurred before the cap was introduced in 1997.

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