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Birmingham Hippodrome loses VAT capping case

13th Mar 2013
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A Birmingham venue has lost an appeal for a VAT refund in a complex tax dispute involving changes to capping provisions on tax refunds.

In the upper tier tribunal case of Birmingham Hippodrome Theatre Trust v HMRC [2013]UKUT 057 (TCC) the nightclub’s theatre services were treated as taxable by HMRC. However, it was later established that these services should have been exempt. 

Birmingham Hippodrome had previously charged output VAT and therefore claimed this back from HMRC. However, the Hippodrome had also previously claimed input VAT related to its (then) taxable supplies, to which it should not have been entitled since its supplies were exempt.

How to reclaim input tax
One of the basic principles of the VAT system is that VAT on purchases (inputs) is recoverable if the purchases are consumed in making taxable supplies (outputs).  Interpreting this principle is difficult in relation to many industries, including the following:

• Businesses making exempt supplies (e.g. those involved in finance, insurance, health, education, property, sports, charities, etc.) need to understand when they can recover input VAT.

• Entities involved in restructuring (e.g. holding companies, share acquisitions, share issuing, etc.) might not have a taxable activity.

• Businesses which allow private use of business assets can have their ability to recover input VAT restricted.

Source: Gabelle

Things were complicated further by changes to limits on how many years claims for VAT refunds can be backdated.

A three-year year cap was introduced in 1996, but in 2006 the courts ruled that the provisions had not provided a sufficient transition period. So in 2006 Birmingham Hippodrome was entitled to claim the output VAT charged in error prior to the 1996 capping provisions, explained Kevin Hall, VAT consultant at the Gabelle tax consultancy. 

However, the capping provisions do not allow HMRC to assess Birmingham Hippodrome for the input VAT, as the error was discovered after the cap had expired. In the tribunal case, HMRC was trying to stop Birmingham Hippodrome receiving both the input VAT and the output VAT. 

When the first-tier tribunal heard the case, it considered Article 81(3a) of VAT Act 1994, which permits HMRC to ignore the capping provisions and to offset out-of-time VAT debits (such as input VAT that was not repayable) against out-of-time VAT credits (eg overpaid output VAT), where the VAT credits and debits were both triggered by the same mistake, Hall said.

The upper tribunal rejected Birmingham Hippodrome’s appeal. The case contains 44 pages of detailed technical arguments on the precise meaning of Article 81(3a), plus other issues such as transition periods and the principle of legal certainty. 

In light of the complex technical issues involved, it would not be surprising if this decision too is appealed by Birmingham Hippodrome, Hall said. 

Rob McCann, director at the VAT People, said the tribunal decision was “common sense”. It showed that that companies cannot pick and chose when they are entitled to VAT refunds and when they have underpaid VAT and owe the taxman, he said. In cases where a client has overpaid and may have underpaid similar amounts it may not be worth asking for a VAT refund, he added.

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