London council wins VAT repayment appeal

Kensington and Chelsea council in London has won an appeal to claim nearly £600,000 in VAT.

In November 1985, HM Customs and Exercise (now HMRC) issued guidance that building control fees charged by local authorities in England and Wales were subject to VAT from 1 April 1985. 

In 1995, the guidance was changed to say that VAT should not have been charged on building control fees for non-domestic properties during that time period. 

The Royal Borough of Kensington and Chelsea tried to recover VAT (£584,572) it had mistakenly paid on non-domestic building control fees under section 80 of the Value Added Tax Act 1994.

The first tier tribunal [Kensington and Chelsea v HMRC TC03850] heard evidence about whether the council was entitled its VAT reclaim based on its method for re-claiming the money; and the absence of evidence as to which, if any, repayment claims had been made by people other than the council.

Councils can use two methods for processing claims in respect of Building Regulation Fees.

The first is for councils to accept claims for refunds of VAT and make repayments to the person by whom or on whose behalf the work was carried out. Tax should not be repaid to persons other than the person to whom the tax was originally charged.

Evidence of tax payment will be the original invoice, receipt or other documentary evidence of tax payment; and it will be necessary for the council to issue a credit note for the tax refunded.

Under the second method, applicants for refunds apply, or are referred by local authorities, to Customs & Excise who acts on behalf of councils to process and pay claims for refunds of tax and statutory interest.

Councils need to authorise Customs and Excise to make the payments direct to the claimants. 

If the first method is used, claims should be made direct to the council. Customs will not make any repayments direct to claimants unless authorised. The council should recover the tax from Customs and Excise on the normal VAT return.

Method two is intended to reduce burden on councils of administering repayments. The cases in which applicants are to be referred back to local authorities for evidence of payment should be kept to the minimum.

Kensington and Chelsea chose the second method for reclaiming VAT.

The tribunal had to decide on matters including whether the burden of proof was discharged; and whether the method the council used for reclaiming VAT operated as an assignment/waiver for all possible VAT repayment claims, as HMRC argued, or only as a waiver for VAT repayment claims actually made, as argued by Kensington and Chelsea.

The tribunal allowed the council’s appeal.