Indirect tax news from the past week
HBOS and Lloyds: interest on historical bad debt relief claims – FTT
Until 1997, the UK's VAT bad debt relief (BDR) scheme was subject to a "property condition" which denied VAT relief unless title in the goods had passed to the customer. This condition was challenged in the courts, and taxpayers including HBOS and Lloyds submitted historical BDR claims pending the conclusion of the litigation. When the courts eventually ruled in the taxpayer’s favour, HMRC paid historical BDR claims including a payment of £12.2m to HBOS and Lloyds in 2019. However, HMRC only paid statutory interest from the date claims were submitted (in 2007-09) rather than from when the taxpayers should have been able to claim BDR (in the 1990s). The First-tier Tribunal has now endorsed this approach. Statutory interest was due to the extent that an error by HMRC caused a delay in taxpayers’ BDR refunds. The property condition, however, was set out in UK VAT legislation. It was not an error on HMRC’s part, but a deficiency in an act of Parliament. HMRC may have reflected this error in their guidance, but the taxpayers had not submitted claims earlier because they believed that the property condition was legally valid, not because they had relied on the guidance. Therefore, although there had been a delay in the taxpayers’ BDR refunds, it could not be attributed to HMRC and interest was only payable from 2007-09 to 2019. (Contact: Aaron Bissett).
Kollaustraße 136: input VAT recovery on deferred rent – AGO
Grundstücksgemeinschaft Kollaustraße 136 (GK) rented a property in Germany from a landlord which operated cash accounting. Rent under the lease was deferred for four years, so GK did not pay rent for 2009-12 until 2013-16, and it did not claim input tax credit until it made the payments. The German tax authorities assessed GK on the basis that it should have recovered input tax in 2009-12 (and by the time of the enquiry it was time-barred from correcting its VAT position for those years). AG Evgeni Tanchev disagreed with their approach. Under Article 167 of the Principal VAT Directive, a right to input tax deduction arises when the tax becomes chargeable. GK’s entitlement to input tax recovery was therefore linked to the landlord’s obligation to account for output tax, and GK could not recover input tax until the landlord accounted for output tax in 2013-16. The AG supported his conclusion with analysis of the context and origins of the Principal VAT Directive, but also noted that permitting (or obliging) GK to recover input tax before the lessor accounted for output tax would result in a considerable cash flow benefit for the taxpayers. He concluded that GK had been right to recover input tax in 2013-16. (Contact: Oliver Jarratt).
Bollinway: repayment supplement following assignment of input tax credit – FTT
In 2018, Acepark Ltd bought Toys “R” Us Properties Ltd (TRUP) and transferred its properties to Bollinway Properties Ltd (a new subsidiary) for £355m. Bollinway included an input tax credit of £71m in a VAT return which it filed on 2 November. It asked HMRC to offset the credit against TRUP’s corresponding output tax liability, and following some enquiries from HMRC and the signing of a letter of authorisation, HMRC credited the input tax to TRUP on 20 December. Bollinway, recognising that this was more than 30 days after it had submitted its repayment return, requested repayment supplement of £3.5m. The First-tier Tribunal has ruled that supplement was not due. Any delay in HMRC processing the repayment was, once time for reasonable enquiries had been factored in, less than 30 days. Even if there had been a longer delay, the FTT determined that Bollinway had, by its letter of authorisation, assigned its input tax credit to TRUP. Although the assignment did not take place until after the alleged delay, it extinguished Bollinway’s entitlement to the input tax and also any entitlement to repayment supplement. Bollinway’s appeal was dismissed. (Contact: Nicole Faith).
G: acquisition VAT on Polish motor fuel – CJEU
In response to concerns about VAT fraud on intra-EU supplies of motor fuel, Poland introduced a rule that VAT should be accounted for on acquisitions of fuel within five days of it arriving from another EU Member State. In G, the CJEU has ruled that the Polish rules were incompatible with the Principal VAT Directive. VAT accounting on acquisitions can be separated into three stages: the chargeable event (the acquisition itself), followed by chargeability (i.e. the tax point), and finally payment. Poland required payment after the chargeable event had taken place, but before the VAT had become chargeable. This was incompatible with the specific provisions around tax points for acquisitions in Article 69 PVD. EU Member States have the power to require interim payments of VAT, but in the Court’s judgment this only allowed Poland to shorten the period between VAT becoming chargeable and the date that payment was due. It did not allow Poland to bring forward the time when VAT became chargeable. (Contact: David Walters).