VAT Reclaim Limitation Unlawful

The House of Lords has issued a decision which will be unpopular with HM Revenue and Customs (HMRC): it has ruled that the reduction in time limits for making claims for refunds of unclaimed input VAT introduced by rules made in 1996 and 1997 is unlawful.

 

The decision follows the introduction of a transitional period for reclaiming overpaid output tax resulting form cases involving Marks and Spencer and Grundig. However, HMRC did not introduce a similar transitional period relating to unclaimed input VAT.

 

The Lords ruled that the rules were incompatible with EU law in that they were retrospective and no provision was made for a transitional period for claims. Originally, claims to recover VAT under claimed or overpaid were not subject to time limits, but in 1996, a six-year limit was introduced and this was halved in 1997. However, no limit was applied to restrict claims of unclaimed input VAT until 1997, when the three-year limit was put in place. It was this change, which was unannounced, which was deemed to be unfair by the Lords.

 

The decision means that the limitation is unenforceable and claims for unclaimed input VAT can, subject to having the appropriate evidence necessary, be made without time limit.

 

It is expected that this decision will cost the Treasury almost £1bn. HMRC will undoubtedly act to close this loophole by reintroducing the time limit subject to an appropriate period of notice, so if you have unclaimed VAT stretching back several years, the time to start putting your claim together is now.

 

One of the less well-reported items in the recent Budget was the proposed harmonisation of the enquiry and penalty time limits applying to all taxes and NI contributions.