H M Revenue & Customs lose their appeals on three year cap
Yesterday, 23 January 2008, the House of Lords handed down its decision in two very important cases concerning the three year cap. The outcome was that in the Fleming case the House of Lords agreed unanimously that the way in which the cap was introduced was wrong. In the Condé Naste case the decision was carried by a majority.
In 1996 the Government announced that claims for errors discovered in VAT returns could only be amended within three years. This was to apply to all existing and new claims from that date. There was no transitional period. Initially this only applied to errors made where tax had been overpaid to HMRC (which was then known as H M Customs & Excise – it merged with the Inland Revenue in 2005). A change to the VAT Regulations 1995 was implemented in 1997 that applied the three year cap to situations where there was a reclaim of VAT. Again there was no transitional period.
After the hearing of the Grundig case at the European Court of Justice it was clear that changes to time limits needed a transitional period. HMRC tried to meet these requirements by setting out when and how claims would be entertained in official announcements in Business Briefs.
The House of Lords decided that a transitional period could only be effected by legislation and HMRC’s attempts to do it administratively were ineffective.
Does this mean the end of the three year cap?
It seems unlikely that the three year cap will disappear. The limit has been imposed now for over ten years. What is likely to happen is that any claims that HMRC rejected, or which were not made because of the imposition of the three year cap, might be reactivated or submitted now while HMRC and the Government scurry around to introduce legislation that gives effect to a transitional period.
VAT Advisers in the UK are waiting for HMRC’s response to the House of Lords decision. As the House of Lords is the highest Court in the UK, this matter has now been decided.
This is on the one hand good news for the affected businesses. On the other it is bad news for the Government which is going to have to pay the blocked claims for input tax and taxpayers who may have to foot the bill for the mistake of not getting the legislation right the first time.
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