A claim in all but name… Graham Elliott (City & Cambridge Consultancy Ltd) reviews the Upper Tribunal's decision in HMRC v Vodafone Group Services.
Let’s assume you have paid too much VAT or claimed too little. You can rectify this by making a ‘claim’ under VATA 1994 s 80(2). This is subject to time limits.
But what is meant by the word ‘claim’? Does it refer solely to a sum of tax that the claimant believes is due to him, or does it refer also to the reason why it is due? It is tempting to think that the answer cannot impact on the financial outcome, but it does, as the Upper Tribunal decision in Vodafone [2016] UKUT 89 illustrates.
To explain the distinction, say you believe that you have under-claimed VAT on a partial exemption miscalculation, and you make a ‘claim’, which HMRC disputes. Then a couple of years later, you notice that you had accounted for VAT on sales which ought to have been zero rated. The problem is that you are time barred from making that second ‘claim’. If you take the view that the word ‘claim’ merely relates to the figures behind the tax situation, you would think that the later discovery adds lustre to your original partial exemption claim. If your initial basis proves inadequate, you still call it a valid ‘claim’ by substituting your rationale based on zero rated supplies. You thereby circumvent the time bar that otherwise would have precluded the second claim.
But if the word ‘claim’ presupposes a basis for the claim, the second basis cannot simply displace the first, since the first ‘claim’ is of input tax and not of output tax, and related only to partial exemption and not to the liability of supplies.
Vodafone had the same situation. It claimed originally in regard to a disputable interpretation of supplies, but later discovered some basic and uncontroversial accounting errors that had caused an over-declaration which, on its own merits, was time barred. Vodafone saw an opportunity to swap the basis of the first claim (which was debatable) with the basis of the second (which was uncontroversial, except as regards the time bar). And as if by magic, the later claim becomes the earlier one, and the more debatable issue becomes irrelevant.
HMRC cannot accept this. It says that ‘claim’ must imply a basis for the actual claim made and not merely a set of figures.
It is not an easy point, which is why the First-tier Tribunal (FTT) supported Vodafone’s ‘displacement theory’, whereas the Upper Tribunal has reversed it. The FTT said that ‘claim’ (whilst assuming an original valid basis) cannot be glossed with the meaning that it is based irremediably on the original premise. It is simply what it says on the tin. The Upper Tribunal thought that this was illogical. As the claim must have had a basis, it must be said to include only that basis, which cannot be displaced by another.
The arguments for and against the taxpayer are many and varied, but I think they boil down to this: the FTT carried out a linguistic analysis of the words, but the Upper Tribunal viewed it largely from the perspective of tax policy. The Upper Tribunal’s view seems initially to be more attractive, since the outcome of the FTT’s view appears capricious, so I would usually prefer it. But on this occasion I prefer the linguistic analysis. This is because it does away with the supplementary question as to what measure (if any) of change to the basis of claim can be regarded as acceptable or unacceptable (which cannot be clearly and certainly predicted). It also acknowledges that the draftsman could so easily have defined the claim in this way by adding the word ‘reasoned’ or ‘justified’ before ‘claim’, or might have added a supplementary provision that a claim is deemed to relate solely to the reasoned basis given for it at the time it is made. Save in secondary legislation, which makes the different point that a claim has to be justified in order for HMRC to approve it, no such limitation is provided. Accordingly, I think the Upper Tribunal was wrong to reverse the FTT’s decision.
A claim in all but name… Graham Elliott (City & Cambridge Consultancy Ltd) reviews the Upper Tribunal's decision in HMRC v Vodafone Group Services.
Let’s assume you have paid too much VAT or claimed too little. You can rectify this by making a ‘claim’ under VATA 1994 s 80(2). This is subject to time limits.
But what is meant by the word ‘claim’? Does it refer solely to a sum of tax that the claimant believes is due to him, or does it refer also to the reason why it is due? It is tempting to think that the answer cannot impact on the financial outcome, but it does, as the Upper Tribunal decision in Vodafone [2016] UKUT 89 illustrates.
To explain the distinction, say you believe that you have under-claimed VAT on a partial exemption miscalculation, and you make a ‘claim’, which HMRC disputes. Then a couple of years later, you notice that you had accounted for VAT on sales which ought to have been zero rated. The problem is that you are time barred from making that second ‘claim’. If you take the view that the word ‘claim’ merely relates to the figures behind the tax situation, you would think that the later discovery adds lustre to your original partial exemption claim. If your initial basis proves inadequate, you still call it a valid ‘claim’ by substituting your rationale based on zero rated supplies. You thereby circumvent the time bar that otherwise would have precluded the second claim.
But if the word ‘claim’ presupposes a basis for the claim, the second basis cannot simply displace the first, since the first ‘claim’ is of input tax and not of output tax, and related only to partial exemption and not to the liability of supplies.
Vodafone had the same situation. It claimed originally in regard to a disputable interpretation of supplies, but later discovered some basic and uncontroversial accounting errors that had caused an over-declaration which, on its own merits, was time barred. Vodafone saw an opportunity to swap the basis of the first claim (which was debatable) with the basis of the second (which was uncontroversial, except as regards the time bar). And as if by magic, the later claim becomes the earlier one, and the more debatable issue becomes irrelevant.
HMRC cannot accept this. It says that ‘claim’ must imply a basis for the actual claim made and not merely a set of figures.
It is not an easy point, which is why the First-tier Tribunal (FTT) supported Vodafone’s ‘displacement theory’, whereas the Upper Tribunal has reversed it. The FTT said that ‘claim’ (whilst assuming an original valid basis) cannot be glossed with the meaning that it is based irremediably on the original premise. It is simply what it says on the tin. The Upper Tribunal thought that this was illogical. As the claim must have had a basis, it must be said to include only that basis, which cannot be displaced by another.
The arguments for and against the taxpayer are many and varied, but I think they boil down to this: the FTT carried out a linguistic analysis of the words, but the Upper Tribunal viewed it largely from the perspective of tax policy. The Upper Tribunal’s view seems initially to be more attractive, since the outcome of the FTT’s view appears capricious, so I would usually prefer it. But on this occasion I prefer the linguistic analysis. This is because it does away with the supplementary question as to what measure (if any) of change to the basis of claim can be regarded as acceptable or unacceptable (which cannot be clearly and certainly predicted). It also acknowledges that the draftsman could so easily have defined the claim in this way by adding the word ‘reasoned’ or ‘justified’ before ‘claim’, or might have added a supplementary provision that a claim is deemed to relate solely to the reasoned basis given for it at the time it is made. Save in secondary legislation, which makes the different point that a claim has to be justified in order for HMRC to approve it, no such limitation is provided. Accordingly, I think the Upper Tribunal was wrong to reverse the FTT’s decision.
