In HMRC v Southern Cross Employment [2015] UKUT 122 (1 April 2015), the UT found that HMRC was bound by a contract with the taxpayer.
HMRC had paid £1.4m to Southern Cross for repayment of VAT and associated interest and now sought to recover it. Southern Cross contended that the repayment had been made under a binding contract.
There were three issues: (1) Did VATA 1994 s 80 bar HMRC from entering into a binding agreement with Southern Cross? (2) Would any compromise agreement have been ultra vires and so void? (3) Was a compromise agreement formed on the facts?
In relation to (1), the UT found that s 80 did not bar HMRC from entering into a binding agreement to settle a claim. The UT referred inter alia to DFS [2002] EWHC 807 – which establishes that s 85 allows HMRC to enter into a binding agreement in the context of an appeal – and noted that there was no reason why such ability would not exist in the absence of an appeal.
As for (2), the UT again found in favour of Southern Cross. The fact that it was later established that the supply of dental nurses to dentists was standard rated and not exempt, as agreed by HMRC, did not make the agreement void.
Finally, in relation to (3), the UT found that the pattern of correspondence between HMRC and Southern Cross, viewed objectively, pointed towards a process of negotiation and, in the end, an intention to conclude a contractual agreement. The UT noted in particular the language used by the parties, for instance the use of expressions such as ‘offer’ and ‘accept’.
Why it matters: The case is interesting on two grounds: firstly, it confirms that HMRC can enter into agreements relating to VATA 1994 s 80 repayments; and secondly (and perhaps most importantly), it suggests that such agreements are binding even if the position agreed by HMRC is then judicially found to be wrong.
Graham Elliott (Withers) said the decision ‘is an important confirmation of the principle that when a taxpayer and HMRC sign off on a negotiated settlement, that should be the end of the matter’. He added: ‘The law is in HMRC’s favour by allowing them to recoup a refund, which creates uncertainty for taxpayers; but this decision limits HMRC’s ability when the refund arises under a compromise agreement. That said, there remains doubt on the point when the cause of HMRC’s change of heart arises from jurisprudence that existed at the time of the refund, and seems only to relate explicitly to cases where the contrary interpretation was established later. The decision takes steps in the right and fair direction, and reveals the fact that the law is nevertheless weighted unfairly in HMRC's favour.’
In HMRC v Southern Cross Employment [2015] UKUT 122 (1 April 2015), the UT found that HMRC was bound by a contract with the taxpayer.
HMRC had paid £1.4m to Southern Cross for repayment of VAT and associated interest and now sought to recover it. Southern Cross contended that the repayment had been made under a binding contract.
There were three issues: (1) Did VATA 1994 s 80 bar HMRC from entering into a binding agreement with Southern Cross? (2) Would any compromise agreement have been ultra vires and so void? (3) Was a compromise agreement formed on the facts?
In relation to (1), the UT found that s 80 did not bar HMRC from entering into a binding agreement to settle a claim. The UT referred inter alia to DFS [2002] EWHC 807 – which establishes that s 85 allows HMRC to enter into a binding agreement in the context of an appeal – and noted that there was no reason why such ability would not exist in the absence of an appeal.
As for (2), the UT again found in favour of Southern Cross. The fact that it was later established that the supply of dental nurses to dentists was standard rated and not exempt, as agreed by HMRC, did not make the agreement void.
Finally, in relation to (3), the UT found that the pattern of correspondence between HMRC and Southern Cross, viewed objectively, pointed towards a process of negotiation and, in the end, an intention to conclude a contractual agreement. The UT noted in particular the language used by the parties, for instance the use of expressions such as ‘offer’ and ‘accept’.
Why it matters: The case is interesting on two grounds: firstly, it confirms that HMRC can enter into agreements relating to VATA 1994 s 80 repayments; and secondly (and perhaps most importantly), it suggests that such agreements are binding even if the position agreed by HMRC is then judicially found to be wrong.
Graham Elliott (Withers) said the decision ‘is an important confirmation of the principle that when a taxpayer and HMRC sign off on a negotiated settlement, that should be the end of the matter’. He added: ‘The law is in HMRC’s favour by allowing them to recoup a refund, which creates uncertainty for taxpayers; but this decision limits HMRC’s ability when the refund arises under a compromise agreement. That said, there remains doubt on the point when the cause of HMRC’s change of heart arises from jurisprudence that existed at the time of the refund, and seems only to relate explicitly to cases where the contrary interpretation was established later. The decision takes steps in the right and fair direction, and reveals the fact that the law is nevertheless weighted unfairly in HMRC's favour.’
