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Landmark court ruling confirms retrospective VAT capping illegal

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23rd Jan 2008
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HMRC has just suffered a significant defeat in a landmark VAT case at the House of Lords. The case concerned retrospective capping measures which introduced a 3 year time limit for reclaiming overpaid VAT in 1997. The court agreed with the earlier findings of the Court of Appeal that such measures were illegal due to their retrospective nature and lack of transitional provisions.

The two respondents in the judgment Fleming (t/a Bodycraft) v HMRC and Condé Nast Publications Limited v HMRC had found that their six year reclaims were effectively time barred when HMRC introduced the three year limit.

Following its defeat at the Court of Appeal in 1996, HMRC brought out Business Brief 13/06, this details what claims may be made as follows:

A claim can be made where an amount:

  • has been improperly paid as VAT before 4 December 1996; or
  • has been overdeclared as output tax in an accounting period ending before 4 December 1996; or
  • became deductible as input tax on or before 30 April 1997 and has not yet been deducted.

Claims falling within the scope of section 80 of the VAT Act 1994 will be paid only where HMRC are satisfied that to pay the claim will not result in the unjust enrichment of the claimant.

Per the Business Brief 13/06 the judgment has implications beyond late claims for input tax. HMRC accept, that any claim, under regulations 29, 34 or 35 of the VAT Regulations 1995, or section 80 of the VAT Act 1994, arising before the enactment of the respective capping measures, is effectively uncapped. However, this does not mean that the 3-year time limits, as they operate currently since the date of their enactment, are themselves contrary to Community law or in any sense invalid.

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