VAT reclaims could drag on for years

by Calum Fuller

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31 Aug 2012

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THE COURTS are presumably growing tired of VAT reclaims cases now.

At least, if they aren't, they soon will be.

In July, former high-street retailer Littlewoods had its claim sent back to the UK courts by the European Court of Justice, sparing – at least temporarily – HM Revenue & Customs a bill that could have run into the billions.

The dispute centred on whether refunds on VAT overpayments, made by Littlewoods between 1973 and 2004, should have been refunded with simple interest or with compound interest.

The claims were made where customers had failed to fully pay for goods, but the retailers had paid the full VAT to the taxman. Many now predict the UK court will rule in the taxman's favour, which will see the VAT returned to Littlewoods with simple interest.

Ever since it was ruled that the UK law on VAT was not compatible with European legislation, there has been a steady stream of claims making their way through the courts, with many ending up in Europe.

There were two reasons that previously stopped claims such as Littlewoods' from being brought.

The first reason was that the claimant had to prove customers who had not kept up payments were insolvent, and the second condition was that all goods remained the property of the retailer until the price had been fully paid.

When it was ruled those measures contravened EU law, the claims started. The latest, brought by BT and GMAC – the finance arm of General Motors – is over bad debts caused by customers failing to keep up payments on goods purchased.

The claims stretch all the way back to when VAT was first introduced in 1973, and, in the case of GMAC, cover the period up to 1997.

It's a risky business for HMRC. The worst-case scenario is that several similar claims are lodged after a ruling against them, potentially blowing a gaping hole in the public coffers.

With such a severe state of affairs not beyond the realms of possibility, it is not surprising that HMRC plans to fight tooth and nail to keep repayments down, especially in a climate where it is under considerable pressure to maximise revenues as the country tries to service its deficit.

The problem its faces, though, is that UK courts have already recognised the British law did not match the EU's legislation, which means that where companies can prove they overpaid, they will get money back. It's just a matter of how much.

But proving overpayment is harder than one might expect. Recovering documentation dating back to 1973 can prove difficult for some businesses, as most simply no longer have those records.

So what happens now? GMAC and BT will receive some form of repayment, says Pinsent Masons VAT associate Steven Porter.

But disaster is far from imminent for the taxman, and it does not have to get its cheque book out just yet, points out MHA MacIntyre Hudson head of VAT Gerry Myton. The avalanche of copycat claims may not materialise either, Myton adds, given that the European courts could well become "fatigued" with the number of claims emanating from the UK.

The process is likely to drag on for a long while yet, with the eventual result potentially years away. Appeals will be lodged, with the case handed between the courts until a settlement is reached.

Ultimately, the issue will be a laborious one, with companies from various sectors testing the waters, with similar ones waiting in the wings, watching with interest. That these cases are limited to particular sectors could limit the extent of the damage. It could be costly, and it will not go away any time soon, but the outcome is far from clear-cut.

Image credit: Shutterstock

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