19925

VALUE ADDED TAX — assessment clawing back input tax for which credit previously taken — assessment not appealed and discharged by setting off against repayment due — request that matter be re-opened in light of subsequent case-law — rejection of request — appeal against assessment — extension of time for bringing appeal granted — determination of preliminary issue — whether claim made under VATA 1994 s 80 or VAT Regs 1995 reg 29 — determination that appeal within s 83(p) and neither s 80 nor reg 29 in point though reg 29 more closely relevant 

MANCHESTER TRIBUNAL CENTRE

ADVANCED MEDICAL SOLUTIONS GROUP PLC
Appellant
	
- and -

THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE AND CUSTOMS
Respondents

		Tribunal:	Colin Bishopp (Chairman)
				 
Sitting in public in Manchester on 24 November 2006

Paul Bendel of Baker Tilly, chartered accountants, for the Appellant 
Nigel Poole, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents 

© CROWN COPYRIGHT 2006

DECISION ON PRELIMINARY ISSUE

1.	In June 2001 the Respondents made an assessment designed to recover from the Appellant input tax for which it had claimed, and had been allowed, credit in its prescribed accounting periods 07/98, 12/98, 12/99, 01/00 and 03/00. The total sum assessed, and which remains relevant, was £38,093. The tax had been charged on professional fees incurred by the Appellant in connection with two share issues, one abortive and the other successful. As the law was understood at the time, the input tax was not recoverable. However, in a line of cases culminating in the decision of the Court of Justice in Kretztechnik AG v Finanzamt Linz (Case C-465/03) [2005] STC 1118, it was established that input tax incurred in the context of a share issue was to be treated as residual input tax, recoverable to the extent that the taxpayer’s own supplies were taxable. As the Appellant makes only taxable supplies the whole of the input tax which had been assessed was (as the Respondents now accept) deductible in the Appellant’s hands, the credit was correctly claimed and the assessment should not have been made. 
2.	In December 2004, and therefore more than three years after the assessment was made, the Appellant sought a repayment of the tax, by means of a request for reconsideration of the assessment followed, when the Commissioners refused to make any repayment, by a belated appeal to the tribunal. An extension of time for bringing the appeal was granted at an earlier stage in these proceedings. Even though they accept that the tax in issue should not have been assessed, the Respondents resist the appeal because, they say, they cannot be required to repay the tax nor, indeed, should they do so, because the claim was made more than three years after the tax was paid by the Appellant, and its claim is therefore time-barred by operation of either section 80(4) of the Value Added Tax Act 1994 or regulation 29(1A) of the Value Added Tax Regulations 1995 (SI 1995/2518). Whether or not they are correct in that contention is not a matter before me in this preliminary hearing. The validity of the time bar is to be considered by the House of Lords in the appeals against the judgments of the Court of Appeal in Fleming v Customs and Excise Commissioners [2006] STC 864 and, possibly, Condé Nast Publications Limited v Customs and Excise Commissioners [2006] STC 1721, and neither party asked me to anticipate the decision in those cases or, if there should be a reference, the view of the Court of Justice.
3.	However, as I have mentioned, there are two different provisions which impose, or purport to impose, time bars and it is possible that different conclusions will be reached about their respective validity. Regulation 29(1A) governs claims within regulation 29(1), for which the Appellant contends, and section 80(4) governs claims falling within section 80(1), which the Respondents argue is the provision relevant here. I am required at this stage to determine only which of those competing arguments is correct. 
4.	So far as material, regulation 29 is in these terms:
“(1)	Subject to paragraphs (1A) and (2) below, and save as the Commissioners may otherwise allow or direct either generally or specially, a person claiming deduction of input tax under section 25(2) of the Act shall do so on a return made by him for the prescribed accounting period in which the VAT became chargeable.
(1A) The Commissioners shall not allow or direct a person to make any claim for deduction of input tax in terms such that the deduction would fall to be claimed more than 3 years after the date by which the return for the prescribed accounting period in which the VAT became chargeable is required to be made.
Paragraph (2) is of no application to the present dispute.
5.	For the Appellant, Paul Bendel of Baker Tilly, its chartered accountants, argued that it had complied with paragraph (1) by making its claims for credit in its returns for the various prescribed periods. The Respondents had made an assessment to recover the amount for which credit had been claimed and allowed, but subsequent events did not affect the fact that the claim had been properly made in accordance with regulation 29(1), and that must remain the governing provision. The essence of the Appellant’s case in the substantive appeal was that the assessment, being incorrect, should be withdrawn, and if that were done—or the tribunal should decide that the assessment was incorrect, as the Commissioners effectively conceded—the regulation 29 claim would remain. Contrary to the Commissioners’ position, Mr Bendel said, section 80 could not apply to an input tax claim; there was no occasion to look beyond regulation 29.
6.	Nigel Poole, counsel for the Commissioners, argued that where, as here, an assessment to recover input tax which was not considered to be due had been made, and the assessment had been paid, regulation 29 was no longer of any relevance and one was obliged to turn to section 80. The relevant provisions of that section, as they were at the material time, are as follows:
“(1) Where a person has … paid an amount to the Commissioners by way of VAT which was not VAT due to them, they shall be liable to repay the amount to him …
(4) The Commissioners shall not be liable, on a claim made under this section, to repay any amount paid to them more than three years before the making of the claim.”
7.	That argument depended in turn on section 73(2) and (9), which provide that:
“(2) In any case where, for any prescribed accounting period, there has been paid or credited to any person—
(a) as being a repayment or refund of VAT, or
(b) as being due to him as a VAT credit,
an amount which ought not to have been so paid or credited, or which would not have been so paid or credited had the facts been known or been as they later turn out to be, the Commissioners may assess that amount as being VAT due from him for that period and notify it to him accordingly.”
“(9) Where an amount has been assessed and notified to any person under subsection … (2) … above it shall, subject to the provisions of this Act as to appeals, be deemed to be an amount of VAT due from him and may be recovered accordingly, unless, or except to the extent that, the assessment has subsequently been withdrawn or reduced.”
8.	Here, the Commissioners had assessed an amount which (albeit, as they now accept, mistakenly) they considered not to be due, and subsection (2) was engaged; that being so, that amount became, in the words of subsection (9), “an amount of VAT” which corresponded with the “amount … by way of VAT” to which section 80(1) referred. Thus, although regulation 29 applied at the outset, by the time the Appellant made its claim for repayment that regulation was spent and only section 80 was of relevance.
9.	Mr Bendel sought to respond to that argument by reliance on subsection 81(3) of the 1994 Act:
“ … in any case where—
(a) an amount is due from the Commissioners to any person under any provision of this Act, and
(b) that person is liable to pay a sum by way of VAT, penalty, interest or surcharge,
the amount referred to in paragraph (a) above shall be set against the sum referred to in paragraph (b) above and, accordingly, to the extent of the set-off, the obligations of the Commissioners and the person concerned shall be discharged.”
10.	That, he said, was the position in this case: the Appellant had not made a payment, but had suffered deduction, by way of set-off, of the amount assessed from other monies due to it from the Commissioners. Thus it could not be said to have “paid” the disputed amount, and the essential condition of section 80(1), that of payment, was not satisfied. If section 80 did not apply, regulation 29 must remain the applicable provision.
11.	Although, as I agree, there is a distinction to be made between payment and set-off, it is not, I think, the distinction Mr Bendel sought to draw. Rather, set-off in its proper sense is a defence to a claim which, by inference, is admitted: it does not discharge the claim, but is advanced in order to defeat the demand for payment. What subsection 81(3) provides for is not a set-off in that sense, but a simple mechanism which avoids the need for the taxpayer and the Commissioners each to make a payment to the other; once a balancing payment has been made their respective obligations are discharged. That very simple scheme mirrors the system for determining in which direction money is to flow, when each owes something to the other, prescribed by section 25 of the 1994 Act. Although I recognise that the term set-off has been used by the draftsman, the effect of the subsection is not of a set-off in the true sense as I have described it, but merely to short-circuit the mechanical process of payment. In my judgment the result of the process envisaged by the subsection is that payments have been made, or are deemed to have been made, by the Commissioners to the taxpayer, and by the taxpayer to the Commissioners. Moreover, it would in my view be absurd if section 80(1) were available to a taxpayer who had handed over money, but not if he had made his “payment” by the operation of section 81(3).
12.	There is also, I think, a further objection to Mr Bendel’s argument, although not one which is directly in point here. If a taxpayer did not claim a deduction for input tax, believing that the law was as the Commissioners thought it to be before the decision in Kretztechnik, and, rather than make a payment he were to receive one, whether in consequence of section 25(3) (because his input tax, even without that he could have claimed, exceeded his output tax for the period) or because of section 81(3), he would, if Mr Bendel is right, be left without any means of making a claim once it was realised that the input tax credit could have been claimed: section 80(1) would not apply, because he had made no payment, and regulation 29 would not help as he had not made his claim in the correct return. Although, as I have said, I am satisfied the argument is wrong for other reasons, I am in any event unwilling to reach a conclusion which would have the effect of leaving a taxpayer in that position without a remedy.
13.	That conclusion does not, however, dispose of Mr Bendel’s argument that withdrawal, or discharge, of the assessment would leave only the original regulation 29 claim. It is a simple argument and, partly for that reason, it is attractive. Mr Poole’s argument requires one to consider what has actually happened, and to analyse the relevant events in stages. The first stage was the making of the original claims in the Appellant’s returns, and the meeting of those claims by the operation of section 25. At this point, as I have said, Mr Poole’s argument was that the operation of regulation 29 was spent: the claims had been made and met, and there was nothing further for which either regulation 29 or section 25 could provide. The next stage was the making of the assessment, in accordance with section 73(2). That assessment was a discrete event, whose effect was not to amend the returns in which the regulation 29 claims had been made—they, and the section 25 adjustment, were undisturbed—but to recover an amount of tax due (as the Commissioners thought) from the Appellant. What the Appellant is seeking now, whatever the form of its claim, is a refund of the tax assessed and, as I have found, paid. That claim can fall only within section 80(1); it cannot be brought within regulation 29.
14.	I have come to the conclusion that Mr Poole’s argument (and, for that matter, Mr Bendel’s) overlooks the nature of the substantive issue before this tribunal. It is an appeal against the assessment made in 2001. Had the appeal been brought within the prescribed time, and had the judgment in Kretztechnik been pronounced three or four years earlier than it was, the appeal would no doubt have been allowed, if it had not been conceded. I do not see how it could have been argued, in the context of a timely appeal against the assessment, that it was in reality a claim for repayment within section 80(1): it would have been a straightforward challenge to an assessment. In my judgment that is what this appeal is, and the fact that it was brought very late does not affect that conclusion. Nor, in my view, is the fact that the amount assessed has been paid material; section 73(9), on which Mr Poole relied, provides that its effect is “subject to the provisions of this Act as to appeals”—that is, where an appeal is brought, the effect is suspended until the appeal has been determined. That, in my view, is the only conclusion consistent with section 84(3)(a) of the Act, which in many cases requires the taxpayer to pay the tax in issue as a condition of appealing. It would be most strange if a taxpayer required to pay for that reason were to be affected by section 73(9), while one excused payment by the operation of section 84(3)(b), or not required to pay at all, were not.
15.	The conclusion I have reached, therefore, is that this is an appeal falling within section 83(p) of the 1994 Act, being one against an assessment under section 73(2). If that is so, it is unnecessary to determine whether regulation 29 or section 80 is in point: in my view, neither has any application. If, however, one is forced to choose it seems to me that section 83(c), which permits an appeal with respect to “the amount of any input tax which may be credited to a person”, which is also apt, though perhaps less so than paragraph (p), to include this appeal, points towards regulation 29. 

COLIN BISHOPP
CHAIRMAN
Release Date: 7 December 2005
MAN/05/0417