Case Report: Birmingham Hippodrome Theatre Trust Ltd v Revenue and Customs Commissioners  UKUT 057 (TCC)
Upper Tribunal (Tax and Chancery Chamber).
Decision released 14 February 2013.
Value added tax – overpaid output tax – input tax credit – taxpayer theatre wrongly accounting for output tax on exempt supplies but receiving input tax repayment – taxpayer claiming repayment of overpaid output tax for 1990 to 1996 – HMRC out of time to claim repayment of input tax wrongly repaid in 2000 and 2001 – HMRC entitled to offset input tax erroneously repaid for 2000 to 2001 against output tax claim in respect of 1990 to 1996 – taxpayer’s appeal dismissed – Value Added Tax Act 1994, s. 81(3A).
Value added tax – claim for repayment of overpaid output tax – theatre wrongly accounted for output tax on exempt supplies but received repayment of input tax – HMRC entitled to offset input tax erroneously repaid for 2000 to 2001 against output tax claim in respect of 1990 to 1996 – taxpayer’s appeal dismissed - Value Added Tax Act 1994, s. 81(3A).
Where a theatre wrongly accounted for output tax on exempt supplies but received input tax repayment, HMRC were entitled under VATA 1994, s. 81(3A) to offset the input tax erroneously repaid for 2000 to 2001 against the output tax claim in respect of 1990 to 1996 so as to reduce the amount payable to the theatre to nil.
Between 1990 and 2004, the taxpayer company had accounted for output tax on supplies which should have been treated as exempt. Between 2000 and 2001 it had received a repayment of input tax, which, because its outputs should have been treated as exempt, should not have been made. In 2006, the taxpayer made a claim for the repayment of its overpaid output tax for those VAT periods in which its claim was not time-barred, which fell between 1990 and 1996. By that stage HMRC were out of time to claim repayment of the input tax wrongly repaid, which exceeded the amount of the overpaid output tax. They relied on the set-off provisions in VATA 1994, s. 81(3A) to resist the taxpayer’s claim.
The First-tier Tribunal (FTT) held that s. 81(3A) entitled HMRC to offset the input tax erroneously repaid for 2000 to 2001 against the claim in respect of 1990 to 1996 so as to reduce the amount payable to the taxpayer to nil. The taxpayer appealed to the Upper Tribunal.
Whether the FTT had erred in holding that HMRC could rely on VATA 1994, s. 81(3A) to refuse the taxpayer’s claim.
The Upper Tribunal (Proudman J and Charles Hellier) dismissed the taxpayer’s appeal.
The wording of s. 81(3A) did not require any restriction of the periods in which the liabilities or amounts payable arose: the subsection applied in relation to ‘any amount’ which HMRC were liable to repay, and to ‘a’ liability to pay ‘a’ sum which had not been assessed, enforced or satisfied; it permitted the offset of those amounts under s. 81(3) to be determined without regard to time limits. There was nothing in s. 81(3) which confined offsets to amounts arising in the same period or which were connected because one was a cost component of the other. There was nothing in the Explanatory Notes published prior to the enactment of the Finance Act 1997 or in the statutory context relevant to matters within s. 81(3A) which suggested a different interpretation.
The Explanatory Notes did indicate that the mischief at which s. 81(3A) was aimed was where a taxpayer had overpaid tax, but had in consequence simultaneously overclaimed input tax, and HMRC could not set the overclaimed input tax against the refund due because they were out of time to issue an assessment of the overclaimed input tax. Thus the section was intended to operate in circumstances where an assessment for the tax could not be made. For the section to address that mischief, ‘liability ... to pay a sum by way of VAT’, in s. 81(3A)(c) had to be read as if it included the words ‘or would have been such a liability had it been assessed in time’.
The effect of s. 81(3A) was to modify the effect of otherwise absolute time limits in favour of the state. That modification had to be done in a way which did not violate fundamental principles of Community law and was in conformity with the object of the VAT directive. If s. 81(3A) permitted the state to pick and choose between out of time periods so that it could choose only those in which the amounts were due to HMRC for the purpose of the set-off the result would not conform to that object. Consequently, if possible, s. 81(3A) should to be construed so as to require all the amounts which would be due to or from HMRC if time limitations were disregarded to be taken into account for the purposes of that setting off. Whilst turning a debt due by HMRC into one due by the taxpayer would clearly be outside the purpose and intent of s. 81(3) and (3A) (and could well breach the principle of legal certainty) the reduction of a debt otherwise due from HMRC to the net amount they would owe if the directive was fully implemented went with the grain of those provisions.
Section 81(3A) hinged around a particular mistake. That was a fundamental feature of the provision. Extending the ambit of the provisions to matters other than a particular mistake would not go with the grain of the legislation. Accordingly, s. 81(3A) could not be interpreted in that way. It was true that the limitation of the effect of s. 81(3A) to adjustments by reason of a particular mistake might mean that a taxpayer paid more or less tax than it otherwise should have under the directive. However, that was the result of the operation of time limits from which s. 81(3A) was an exception. Given that the time limits were not precluded either by the directive or by EU principles, the loss of rights entailed by that limitation of s. 81(3A) could not be precluded either.
The case law of the ECJ made it clear that time limits, so long as they respected the principles of equality, effectiveness and legal certainty, were permissible even though their effect was to deny a right or to curtail the obligation under the sixth directive. Construing s. 81(3A) as requiring HMRC to consider all previous periods in determining the set-off did not conflict with legal certainty. There was a difference between a provision which left the taxpayer exposed to liabilities without limit of time and one which limited the liability of the tax authority by deducting amounts representing an otherwise out-of-time net liability of the taxpayer (Amministrazione dell'Economia e delle Finanze v Fallimento Olimpiclub Srl (Case C-2/08)  BVC 1,019;  ECR I-7501 and Alstom Power Hydro v Valsts ieņēmumu dienests (Case C-472/08)  BVC 332;  ECR I-623 considered). The principle of equality required that that similar situations should not be treated differently unless differentiation was objectively justified, but in this case the state and the taxpayer were in different positions because the state had to protect public revenues in the public interest whereas the taxpayer had no such responsibility. Community law did not require s. 81(3A) to be limited to the set-off of otherwise out-of-time liabilities of the taxpayer which were cost components of the overpaid output tax. Section 81(3A) did not implement the directive, nor was it required by Community law; rather it was part of the domestic time limit regime which provided a domestic limitation to a Community law right.
In the present case, there had been a mistake, namely that of treating the taxpayer’s ticket sales as standard rated, which had been the reason for both the output claim and the repayment. Consequently, s. 81(3A) applied.
SOURCE: CCH Online