Monthly VAT returns – BMW AG win Judicial Review
BMW AG sought a judicial review after HMRC withdrew the company’s use of monthly VAT returns. BMW AG were in the position where its input tax each VAT period was greater than the output tax. In 2002 they sought permission from HMRC to move from quarterly VAT returns to monthly. HMRC granted this permission. In 2006 HMRC put BMW AG back onto quarterly returns.
HMRC’s grounds for withdrawing BMW AG’s use of monthly returns was that the BMW group in the UK was gaining a cash flow advantage from the arrangement.
BMW AG bought all the Minis produced in the UK by the BMW group, even those that were destined for the UK market. BMW paid for the cars supplied in month one half way through month two. The supplier company accounted for VAT on its VAT returns every three months.
BMW AG recovered VAT on its purchases every month, but also accounted for VAT on the sales of cars it made in the UK. The UK supplier was in the payment on accounts scheme, making a payment in the first and second months of each VAT period to be off-set against its total liability for the period.
HMRC had set out its policy on the manipulation of VAT return periods by businesses to gain a cash flow advantage in its Internal Guidance. This was first set out in 2004, and late updated in 2005. HMRC published a Business Brief in 2005 announcing its revised policy. The aim of HMRC was to remove any benefit that might accrue to associated businesses that exploited being on different VAT period ends. If the customer is on a period that ends before the supplier’s, the customer can recover the VAT on the supplier’s invoices before the supplier has to account for the output tax to HMRC – a negative cash flow for HMRC. HMRC indicated in the Business Brief that there had to be little or no commercial rationale for the associated businesses using different VAT period ends.
HMRC accepted that the BMW UK Mini supplier and BMW AG were set up for sound commercial reasons.
HMRC filed evidence with the Court to support its case that it had acted lawfully and taken into account all pertinent facts. Given that the decision of the Court was that HMRC had not acted unlawfully, nor irrationally, nor that its policy breached EU policy, as suggested by BMW AG, there appeared to be little chance of BMW AG being successful in its application. What let HMRC down was that in reaching its decision it had not taken into account all the pertinent facts.
HMRC had only considered the input tax recovery by BMW AG, and its timing in relation to the submission of returns by the UK supplier. It had not considered the impact of the sales by BMW AG in the UK, nor that the UK Supplier was making payments on account. HMRC also didn’t take into consideration whether the UK Supplier would have been in a better position had it not used BMW AG to export its cars.
The Court decided that the application of HMRC’s policy in this case was flawed because HMRC had not considered all the grounds that might justify the businesses being on different VAT return periods, and they did not consider whether the arrangements provided a better cash flow than if the UK supplier had acted as exporter and been a repayment trader itself.
The Court granted BMW AG permission to apply for an order, and made the order, to quash the decision letter issued by HMRC,
This just goes to show that HMRC don’t let the facts get in the way of a good argument.
The impact of this decision is not going to be wide reaching. It will only affect businesses that export a lot of their goods, and make use of an export company. Where these businesses can show that the use of the export company was for sound commercial reasons, and didn’t provide a benefit over the situation that would arise without using an export company, they may have an argument that HMRC mis-applied its policy. Whether it will do them any good will depend on their own circumstances.
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