Ernst & Young VAT News
– 25 April 2008

Welcome to the latest issue of EY VAT News.

In this issue:

• Revised option to tax land and buildings rules from 1 June 2008 published
• VAT Tribunal decision summary : three year capping period
• HMRC material : revised notice 700/9 : transfer of going concern

HMRC released on 23 April 2008 a package of information on the revised rules for the option to tax land and buildings. As foreshadowed in the Budget, the new rules will take effect from 1 June 2008.

The material consists of :

• HMRC Revenue & Customs Brief
  Revenue&CustomsBrief2408
• VAT Information Sheet
  VATInformationSheet0308
• Value Added Tax (Buildings and Land) Order 2008 (SI 2008 No 1146)
  http://www.hmrc.gov.uk/si/2008-1146.pdf
• Explanatory Memorandum
  http://www.hmrc.gov.uk/si/2008-1146em.pdf

20648 LA Leisure Ltd

This case consists of three arguments, two based on EU law principles, challenging the validity under UK law of the application of the three year capping period.

The background is a claim for overpaid output tax lodged on 31 May 2007. The claim related to the three month period ending 30 April 2004. The tax had been paid within a payment on account to Customs on 27 May 2004 deemed to have been paid on the last day on which the return was due being 31 May 2004. The arguments seek to establish that the claim is not three year capped.

The first argument concerns the manner in which the three year cap applies to claims for overpaid output VAT following the introduction of Section 80(4ZA) from 26 May 2005 in contrast with claims for underclaimed input VAT under Regulation 29, ie broadly three years from the end of the prescribed accounting period in the former and three years from the due date of the return in the latter. The argument, based on the comments of the AG in the Marks & Spencer unjust enrichment case (subsequently endorsed in the ECJ judgment), is that this differentiation infringes the European law principles of eqivalence or equal treatment, with the result that Section 80(4ZA) should be disapplied.Chairman (Vellins) agrees with HMRC that this differentiation is not analogous with that between payment and repayment traders in M&S and that this differentiation does not arise out of any action falling foul of the principle of equivalence. Indeed the Chairman agrees with HMRC that the introduction of Section 80(4ZA) actually promoted the principle of equivalence or equal treatment.

The second argument concerns the change effected by the introduction of Section 80(4ZA), ie 'three years before the making of a claim' to 'three year after the end of the prescribed accounting period'. The argument, based on the Marks & Spencer introduction of three year capping case, is that the legislative change represented a reduction in the temporal limit for making a valid (ie non-capped) claim and, in the absence of any transitional provisions, the legislation fails to meet the European law principle of effectiveness with the result that the law is ineffective in so far as it relates to tax arising before 26 May 2005. The HMRC response was thus :

• Customs considered the principle of effectiveness as summarised in the Marks & Spencer case, and the principles emerging from the Fleming case. Customs considered that the outcome of the Fleming case was that the absence of a transitional period for the reduction of the time limit for deduction of input tax pursuant to regulation 29(1A) contravened the principle of effectiveness with the result that no transitional period has yet expired, but submitted that the absence of a transitional period for section 80(4ZA) in the current appeal did not contravene the principle of effectiveness for the following reasons:

1. The purpose of the changes brought in by the Finance Act 2005 was to ensure equality between repayment traders and payment traders in respect of the defence of unjust enrichment
2. Crucially there is no need for a transitional period because there is no directly effective right to be unjustly enriched
3. The change is not to the period of limitation but instead to how it is calculated
4. A budget notice was issued on 16 March 2005 explaining the proposed changes to section 80
5. A transitional period would have had to run for two years and two months in order to incorporate the Appellant’s claim
6. The changes only make a difference in the present case of one month
7. The Appellant had sufficient time to make a claim

• Customs argued that it was important not to see the Fleming decision as a panacea for saying that all legislation that does not include a transitional period is unlawful and must be disapplied. Customs argued that it depended on first as to whether there is a time limit change at all (in the Fleming case there was a change from six years to three years), and secondly it also depends on whether or not there is a directly enforceable right that it may contravene. Customs argued that section 80(4ZA) did not change the time limit at all because the time limit remained exactly the same, namely three years, and was not any shorter at all, but what is different is the date from when it was computed.

Chairman broadly agreed the HMRC arguments and concluded that there was not a need for a transitional period in these circumstances, such that the absence of one contravened the principle of effectiveness.

The third argument, based on UK law, is that, because the original payment was a payment on account, not directly related to specific output tax or input tax, the claim is under Section 80(1B) rather than Section 80(1), the significance being that the three year period under Section 80(1B) runs from date of payment rather than end of prescribed accounting period. Chairman gives this one short shrift, commenting that this was fundamentally a Section 80(1) claim of overpaid output tax and could not be 'shoehorned' into Section 80(1B) as suggested by the appellant.

The appellant had raised a fourth point – whether, if the appellant had successfully argued that the three year 'clock' ran from 31 May 2004, a claim lodged on 31 May 2007 would be properly payable, ie is the three months 'inclusive' such that a claim lodged on 31 May 2007 would be valid or 'exclusive' such that a claim lodged on 31 May 2007 would be three year capped. Alas the Chairman declined to express a view on the grounds that, in view of the earlier findings, the question was not relevant.

Appeal DISMISSED

Revised Notice 700/9 Transfer of Going Concern

HMRC have issued a revised edition (dated April 2008) of Notice 700/9 Transfer of Going Concern.

The revised notice can be accessed at :
Notice700/9