HMRC operates a restrictive 30-day rule in relation to backdating applications for inclusion within VAT groups. It should exercise its discretion more widely, writes Graham Elliott.
VATA 1994 s 43B gives HMRC discretion to backdate a company’s inclusion in a VAT group registration. It is a notorious fact, however, that HMRC allows minimal retrospection, namely 30 days maximum, and only then where that coincides with the beginning of a tax period. Its discretion, under the VAT legislation, does not mention any limitation. HMRC acknowledges this by saying that, in extraordinary circumstances, it will increase retrospection, but the only example given here is errors by HMRC itself, such as that HMRC mislaid the submitted application. The excuse it gives for this restrictive policy is to avoid taxpayers ‘rewriting fiscal history’ in circumstances where it would mean re-opening closed tax periods.
Since the legislation obliges HMRC to grant admission to the group no later than the day on which it receives the application, the main example it gives is actually irrelevant. Since it is obliged to observe the date of receipt of the application, the mere fact that it mislaid or ignored the application does not mean that it falls under its discretion, since it is bound to grant admission from the date it was actually received. And its concern over the reopening of previous tax periods, whilst valid regarding an applicant which has accounted on the strictly correct basis but then regrets their choice, does not deal with an altogether more likely scenario – that the company was treated as though it were a member of the group, without the application having been submitted.
This describes the scenario in Copthorn Holdings Ltd v HMRC [2015] UKFTT 0405 (TC). This group of companies fell into the error of thinking that one of their number was a member of the VAT group, when it was not. Severe consequences can arise from this situation. In their case, it was the disallowance of a large sum of input tax, because an exempt property supply occurred (between two companies which were not in the VAT group, but which behaved as though they were), even though the final supply from the group to third parties was wholly taxable.
This was a simple administrative blunder. Had a group registration application been made, it would almost certainly have been accepted by HMRC, and even if it had not been accepted, the excluded company would have opted to tax the property, thus creating taxable supplies which would have given rise to full VAT recovery. The tax policy intentions of the group were clear from the transactions and their behaviour. They submitted VAT returns on the premise that the company was part of the group, even though, as a matter of fact, it was not.
It is obvious, here, that there would be no rewriting of history, and no attempt to get a better outcome than the one that had been sought in the first place. There would be no messy accounting entries to perform or ramifications to consider. Granting backdated group registration would confirm, de jure, what has being performed de facto.
There is nothing difficult about this, but HMRC has an exceptionally bad blind spot on it. This is made clear in Copthorn, because this most recent First-tier Tribunal decision was the second in a series. The first hearing involved precisely the same circumstances, and the same appeal by the company against HMRC’s refusal to backdate group registration to recreate what the company had thought to be the position. The tribunal had remitted the matter back to HMRC for further consideration of the plainly meritorious extenuating circumstances. HMRC’s response had been to reconfirm its original decision. Meanwhile, changes of public policy in response to the first tribunal’s criticisms were negligible and, if anything, simply increased HMRC’s restrictive deployment of the powers it had been given by Parliament.
The most recent decision draws the same conclusion, namely that the matter should again be remitted back to HMRC for further consideration. The difficulty is that the tribunal does not have authority to direct HMRC to follow its line. It is a matter for HMRC’s discretion. The judge reached the conclusion with hesitation, not because of the merits of the taxpayer’s case (which were unchallengeable), but because of the futility of batting the point to and fro between the tribunal and HMRC. That said, if HMRC continues to resist Copthorn’s request, in the light of such trenchant criticism of its policy from two tribunal judges, we will draw the conclusion that HMRC is merely trying to ‘show who’s boss’.
A change in the policy, generally to allow repair of situations where a group registration application has been omitted in error, but the behaviour was as if it had been made, would be a sensible change, falling well within the discretion which has been granted by Parliament.
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Copthorn and VAT group registration
HMRC operates a restrictive 30-day rule in relation to backdating applications for inclusion within VAT groups. It should exercise its discretion more widely, writes Graham Elliott.
VATA 1994 s 43B gives HMRC discretion to backdate a company’s inclusion in a VAT group registration. It is a notorious fact, however, that HMRC allows minimal retrospection, namely 30 days maximum, and only then where that coincides with the beginning of a tax period. Its discretion, under the VAT legislation, does not mention any limitation. HMRC acknowledges this by saying that, in extraordinary circumstances, it will increase retrospection, but the only example given here is errors by HMRC itself, such as that HMRC mislaid the submitted application. The excuse it gives for this restrictive policy is to avoid taxpayers ‘rewriting fiscal history’ in circumstances where it would mean re-opening closed tax periods.
Since the legislation obliges HMRC to grant admission to the group no later than the day on which it receives the application, the main example it gives is actually irrelevant. Since it is obliged to observe the date of receipt of the application, the mere fact that it mislaid or ignored the application does not mean that it falls under its discretion, since it is bound to grant admission from the date it was actually received. And its concern over the reopening of previous tax periods, whilst valid regarding an applicant which has accounted on the strictly correct basis but then regrets their choice, does not deal with an altogether more likely scenario – that the company was treated as though it were a member of the group, without the application having been submitted.
This describes the scenario in Copthorn Holdings Ltd v HMRC [2015] UKFTT 0405 (TC). This group of companies fell into the error of thinking that one of their number was a member of the VAT group, when it was not. Severe consequences can arise from this situation. In their case, it was the disallowance of a large sum of input tax, because an exempt property supply occurred (between two companies which were not in the VAT group, but which behaved as though they were), even though the final supply from the group to third parties was wholly taxable.
This was a simple administrative blunder. Had a group registration application been made, it would almost certainly have been accepted by HMRC, and even if it had not been accepted, the excluded company would have opted to tax the property, thus creating taxable supplies which would have given rise to full VAT recovery. The tax policy intentions of the group were clear from the transactions and their behaviour. They submitted VAT returns on the premise that the company was part of the group, even though, as a matter of fact, it was not.
It is obvious, here, that there would be no rewriting of history, and no attempt to get a better outcome than the one that had been sought in the first place. There would be no messy accounting entries to perform or ramifications to consider. Granting backdated group registration would confirm, de jure, what has being performed de facto.
There is nothing difficult about this, but HMRC has an exceptionally bad blind spot on it. This is made clear in Copthorn, because this most recent First-tier Tribunal decision was the second in a series. The first hearing involved precisely the same circumstances, and the same appeal by the company against HMRC’s refusal to backdate group registration to recreate what the company had thought to be the position. The tribunal had remitted the matter back to HMRC for further consideration of the plainly meritorious extenuating circumstances. HMRC’s response had been to reconfirm its original decision. Meanwhile, changes of public policy in response to the first tribunal’s criticisms were negligible and, if anything, simply increased HMRC’s restrictive deployment of the powers it had been given by Parliament.
The most recent decision draws the same conclusion, namely that the matter should again be remitted back to HMRC for further consideration. The difficulty is that the tribunal does not have authority to direct HMRC to follow its line. It is a matter for HMRC’s discretion. The judge reached the conclusion with hesitation, not because of the merits of the taxpayer’s case (which were unchallengeable), but because of the futility of batting the point to and fro between the tribunal and HMRC. That said, if HMRC continues to resist Copthorn’s request, in the light of such trenchant criticism of its policy from two tribunal judges, we will draw the conclusion that HMRC is merely trying to ‘show who’s boss’.
A change in the policy, generally to allow repair of situations where a group registration application has been omitted in error, but the behaviour was as if it had been made, would be a sensible change, falling well within the discretion which has been granted by Parliament.
