View from the House - Negotiation the answer to VAT repayment issue

There has been some pretty wild speculation as to what the decision against the Government in the Elida Gibbs VAT case could eventually cost the Treasury.

At the top end it has been suggested that the courts may go back to the introduction of VAT in 1973 and require back payment of VAT totalling u40bn.

Such a measure would be quite preposterous as it would mean repayments, in many cases, to companies who could not have any possibility of passing the tax onto the original purchaser who actually paid the VAT.

On the other hand, the Government’s attempts to shrug it off as likely to cost ‘just u200m’ is both cavalier, giving the public sector funding crisis, and scarcely credible. Of course, u200m is the bill for similar cases to Elida Gibbs – not the whole range of other cases that could be brought.

The Government will have widespread support for moving to limit the potential for repayment. Nobody will seriously argue that there is any case for refunding VAT paid on company cars – that could cost up to u16bn and would represent a massive case of unjust enrichment.

What, however, cannot be right is the Government’s attempt to limit repayment on overpaid VAT to three years. Indeed, if the Government persists in holding to this time limit, there is a real risk that this decision will be successfully challenged in the European Court on the grounds that it discriminates between the taxpayer, limited to three years in claiming refunds, and the tax collector who is allowed to go back, not three, but six years to demand tax payments.

That has real and practical consequences. It means that an individual or business may be assessed for VAT payments going back six years but will not be able to claim the offsetting input tax going back more than three years.

The test cases are clearly being pursued by large public businesses but equally affect individuals and small businesses. I have an example of someone who built a house for his grandmother by self-build means. That involved buying materials with VAT on them and claiming a refund because they were going into a new build house which is zero rated. Self-building can often be spread over a long time and this could alter the affect if the rule prevents going back more than three years.

It is not surprising that there are a lot of disputed VAT cases against the background of this litigation and proposed legislation. A sports club in my constituency was told as they completed their project that they would not be entitled to a refund of VAT. After my intervention and letters to the minister, local negotiations resolved the matter satisfactorily – but this makes it all fairly arbitrary.

What is now needed is negotiation to agree a fair and equal way of resolving these matters that can avoid expensive and risky litigation. If the Government does not agree to that it could cost the Treasury a lot more.

Malcolm Bruce is Liberal Democrat finance spokesman and MP for Gordon.