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Limiting claims for refunds of overpaid VAT to three years did not breach EU law, tribunal rules

Out-Law News | 11 Dec 2013 | 4:02 pm | 3 min. read

The Government was not acting in breach of EU law when it reduced the length of time taxpayers had to recover overpaid VAT from six to three years, even where that overpayment was not the fault of the taxpayer, a tax tribunal has confirmed.

The Upper Tribunal found that the limitation period, which has since been lengthened to four years, was valid even though Leeds City Council was only required to pay VAT because the UK Government had not incorporated an EU exemption into domestic law (29-page / 250KB PDF). The Sixth VAT Directive exempts supplies made by a public body in fulfilment of its statutory duties from VAT, but HM Revenue and Customs (HMRC) treated the disputed transactions as standard-rated supplies.

The 1997 Finance Act reduced the limitation period for claims for overpaid VAT to three years from 4 December 1996. At the same time, the limitation period was amended to run from the date that the VAT was paid rather than the date on which the mistake was, or reasonably could have been, discovered. Although this was later successfully challenged in the 2008 Fleming case due to the absence of transitional provisions, any claims had to have been made before 1 April 2009 for the previous rules to apply.

Leeds City Council submitted two separate overpayment claims to HMRC. The first of these, submitted on 11 May 2007, concerned VAT paid on memorial items placed in cemeteries, library charges and excess parking charges. The second, on 27 March 2009, concerned VAT paid on trade waste collection charges and administrative charges relating to housing improvement loans.

Although HMRC accepted these claims to the extent that they related to VAT periods ending on or before 4 December 1996, or sums that had been paid in the three years preceding the date of the relevant claim; it rejected the remainder of the claims on the basis that they were time-barred. Leeds appealed; arguing that the three-year limit breached a number of EU principles including its right to an effective remedy, proportionality and certainty. However, the Upper Tribunal ruled in favour of HMRC.

VAT expert Darren Mellor-Clark of Pinsent Masons, the law firm behind Out-Law.com, said that the so-called 'dead period' in which a taxpayer was time barred from recovering overpaid VAT from HMRC was "probably the final major issue requiring resolution" as a result of the change in the limitation period.

"The challenge to the validity of the cap itself was rejected by the Court of Session in 2009 via the Scottish Equitable decision, but the various ancillary issues around the Fleming case have stalked the halls since the House of Lords' decision in 2008," he said.

"The Upper Tribunal was clearly not prepared to accept that Leeds City Council's right to remedy had been frustrated during the period. It remains to be seen whether it will be minded to appeal this robust rejection of its case," he said.

EU law requires there to be an 'effective' remedy for monies paid in respect of tax that has been unlawfully charged. Leeds City Council had argued that, with the expiry of the three-year cap, it had been denied that right. In addition, as limitation periods generally are an exception to the general right to a remedy, they must respect and safeguard EU law principles of legal certainty, effectiveness and proportionality, and must respect taxpayers' legitimate expectations, it said.

However, the Upper Tribunal noted that there was an alternative effective remedy available to Leeds throughout the limitation period, as it was also entitled to rely on the Sixth VAT Directive to challenge HMRC's treatment of its supplies as standard rated. The fact that it had paid the disputed VAT in order to prevent penalties for late payment did not prohibit it from making that claim, it said.

"It is in our view ... not even arguable that HMRC's public position rendered it impossible or excessively difficult for Leeds to assert its rights within a period of three years from payment of the disputed amounts," the Upper Tribunal said in its ruling. "Had Leeds considered that HMRC were wrong about any one or more of the relevant supplies, it could have sought a ruling and then appealed against it."

"We also reject the argument that there is, or has been, a lack of legal certainty. It is perfectly true that the impact of the three-year cap on claims which had accrued at the date of its introduction [...] was unclear, and for a number of years. But [...] there was little room for doubt that the three-year cap was effective so far as it affected payments made after 4 December 1996, the tribunal's decision in Scottish Equitable notwithstanding ... The argument that there is anything disproportionate about a time limit of three years from payment is also not supported," it said.

VAT expert Suzanne McMahon of Pinsent Masons said that the decision showed how "crucial" it was for taxpayers to "keep abreast of developments in VAT law that may affect the VAT status of their supplies".

"It is key that taxpayers take action swiftly to protect their position by submitting claims for any potential overpaid VAT in order to avoid being caught out by the capping provisions," she said. "This is nothing new, as the capping provisions have had a high profile due to the amount of litigation that has surrounded them since 1996."

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