UK: A Claim-changer? The Limitation Period and Claims for Repayment of Overpaid Output Tax

In a recent decision, the UK's First-tier Tribunal has held that a taxpayer can change the reasons underlying an unresolved claim for repayment of output value-added tax, even after the expiry of the time limit for making a claim. The following is an article from the Tax Planning International Indirect Taxes journal written by Dr Craig Rose, Technical Editor at Bloomberg BNA and member of the Bar of England and Wales.

What happens if you make a claim for repayment of overpaid output tax within the limitation period, only to discover before the claim is resolved, but after the expiry of the time limit for bringing a claim, that you have an indisputable claim on different grounds for at least the same amount as you've already claimed? Is it permissible to change the basis of the claim as long as you're not changing the amount claimed? Or does the change of rationale make the claim a wholly new one and therefore barred by the limitation period? These were the questions that the First-tier Tribunal was required to determine in the recent case of  Vodafone Group Services Ltd v HMRC  [2014] UKFTT 701 (TC). In a judgment released on July 21, the tribunal concluded that a claim would not be time-barred in such circumstances.

Overpaid Output Tax

Back in 2007, Vodafone made a claim to HMRC for repayment of just over GBP4 million of output tax for the periods January 2004 to January 2006. The basis of that claim, which was made within the statutory limitation period, was that Vodafone had over-declared tax as a result of its participation in a consumer loyalty card scheme.

Before that claim was resolved, but after the expiry of the time limit for the period covered by the claim, Vodafone realised that they had overpaid considerably larger sums of output tax during that same period for reasons unconnected with the loyalty card scheme. HMRC accepted that such overpayments had indeed been made, but contended that a claim for their repayment could not be brought because of the expiry of the limitation period. In response, Vodafone argued that it had made an in-time claim for repayment of approximately GBP4 million, that HMRC accepted that it had overpaid more than that amount in the relevant period and that it was therefore entitled to the sum claimed, notwithstanding that the original basis of the claim was different.

What's in a Claim?

When the case reached the First-tier Tribunal, for the determination of a preliminary issue on agreed facts, the critical issue was what constituted a "claim" within the meaning of section 80 of the Value Added Tax Act 1994. Section 80(1) provided that, where a person had accounted to HMRC for VAT for a prescribed accounting period, and, in doing so, had brought into account as output tax an amount that was not output tax due, HMRC would be liable to credit the person for that amount. Sub-section (2) further provided that HMRC would only be liable to credit or repay an amount under section 80 on a "claim" being made "for the purpose". Under subsection (4), HMRC would not be liable on a claim to credit overpaid output tax if the "claim" were made more than four years after the relevant date. Subsection (6) went on to provide that a claim under section 80 had to be made in such form and manner and supported by such documentary evidence as HMRC prescribed by regulations.

The relevant regulations were the Value Added Tax Regulations 1995 which provided, in regulation 37, that any "claim" under section 80 of the 1994 Act was to be made in writing " and shall, by reference to such documentary evidence as is in the possession of the claimant, state the amount of the claim and the method by which that amount was calculated ".

Relying on the words " method by which that amount was calculated " in regulation 37, HMRC argued that a "claim" had to include a statement of the reason why the taxpayer considered that VAT had been overpaid. In any event, such a requirement had to be implied into section 80. Either way, the substitution of new reasoning necessarily involved the making of a new claim - one that could not be brought outside the limitation period.

A conclusion to the contrary, HMRC contended, would clearly defeat the intention of Parliament, allowing otherwise time-barred claims to be pursued merely because the taxpayer had an existing claim pending for the same or a higher amount. A change in reasons would also offend against legal certainty because, at the end of the period for making claims, HMRC would not know with finality that no more claims would be made.

Purposive Construction

The tribunal (Judge Barbara Mosedale) rejected the argument based on legal certainty. In circumstances such as those in the present case, HMRC would know, at the point when the time limit expired, that the taxpayer was claiming a stated sum in overpaid tax, and that it was out of time to claim more. In other words, there was certainty about the amount claimed.

As for regulation 37, it presupposed that HMRC would know the reason why the claim was being made. There would not be much point in requiring a method of calculation if the underlying reasoning was unknown. To determine the claim, HMRC had to know both the reasoning and the precise calculation. Similarly, section 80, though not expressly requiring reasons for a claim, assumed that such reasons would be provided. It was inherent in that provision that a claim ought to be accompanied by reasons. But did that mean it was impossible to change the reasons later?

It did not. There was no necessary implication that reasons could not subsequently be amended or changed. Accordingly, on a purposive construction, it was permissible to make a later amendment to the reasons given for the amount already claimed. As a claim with amended reasons could only apply to the amount originally claimed, the time period was unaffected. Nor was there anything in the case law that precluded the judge from reaching that conclusion.

It followed that the preliminary issue would be determined in favour of Vodafone, and the claim for repayment would therefore be upheld.

Use of Speculative Claims to Circumvent Limitation Period

During the course of argument, HMRC had raised the spectre of taxpayers bringing, just before the expiry of the limitation period, spurious speculative "protective" claims for repayment, covering the entire amount paid to HMRC during the relevant period. Such "claims" would then sit in abeyance on the off-chance that the taxpayer later discovered that it had indeed overpaid VAT in that period. It would then activate its in-time claim, circumventing the limitation period.

The judge swatted away that bogeyman. A claim under section 80 had to be made "for the purpose", namely the credit or repayment of an "amount". A spurious speculative claim, made without reasons, or simply to circumvent the limitation period, could not constitute a "claim" for an "amount" of overpaid tax at all since, on the judge's interpretation, such a claim had to be supported by a reason and have, as its purpose, the repayment of an amount of overpaid VAT, not the circumvention of the limitation period. If such a legitimate application had been made, there was nothing to prevent a post-limitation amendment of the basis for the claim. Any other interpretation would result in HMRC receiving a windfall in the factual scenario of this case. The judge thought that such a scenario was likely to be rare - she was unaware of the point having previously been raised before the First-tier Tribunal. While that may be of some comfort to HMRC, it remains to be seen whether the judgment will encourage other taxpayers to search for fresh reasons to support unresolved claims, notwithstanding the expiry of the limitation period.

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