Restitution of overpaid VAT – clouds and silver linings

EU law has thrown up some very abstruse issues, none more so that the compatibility of national VAT regimes with European VAT Directives. Where there has been a charge to tax pursuant to national rules which infringe EU law, then that overpayment of tax can be recovered.

GE Capital solutions logo, via the GE websiteSometimes the issue concerns a relatively straightforward overpayment. For example, the Irish Times reported a little while ago that GE Capital Woodchester Ltd has brought legal proceedings against the Revenue claiming it has overpaid some €19 million due to the State’s alleged failure properly to implement an EU directive related to the VAT treatment of hire purchase transactions. The principle of restitution of overpaid taxes is well established at Irish law (see O’Rourke v The Revenue Commissioners [1996] 2 IR 1 (HC, Keane J) and Harris v Quigley [2006] 1 IR 165, [2006] 1 ILRM 401, [2005] IESC 79 (01 December 2005) following Woolwich Building Society v Inland Revenue Commissioners [1993] AC 70 (HL) (pdf); see also In re Article 26 and the Health (Amendment) (No 2) Bill, 2004 [2005] IESC 7 (16 February 2005)) so the main question in the Woodchester proceedings (at least as they appear from the newspaper report) will be whether the overpayment is in fact made out.

In other situations, the issue is not quite so straightforward. For example, in Deutsche Morgan Grenfell Group Plc v Inland Revenue [2007] 1 AC 558, [2006] UKHL 49 (25 October 2006), the ECJ had held that the UK’s VAT rules, which had treated groups of companies whose parents were resident in the UK more favourably than groups with parents resident abroad (including in other EU member states), were contrary to EU law. The consequences were that UK subsidiaries of foreign parent companies were entitled to refunds of overpaid taxes, and the House of Lords in Deutsche Morgan Grenfell (noted here) affirmed that the subsidiaries were entitled to maintain their claims not only on the basis of the Woolwich principle, but also on the basis of other common law restitution claims (such as that for mistake, as exemplified by Kleinwort Benson v Lincoln City Council [1999] 2 AC 349, [1998] UKHL 38 (29th October, 1998)). These principles are now being applied to other claimants in complicated set of test cases currently working their way through the English courts.

Again, in Fleming (t/a Bodycraft) v Revenue and Customs [2008] UKHL 2 (23 January 2008), the incompatibility between national law and EU law arose because EU required that, where the national implementation of an EU-compliant tax was amended, transitional provisions were required as a matter of EU law to allow taxpayers to submit claims which had accrued under the original provisions but which would not be available under the amended provisions. And the Deutsche Morgan Grenfell principles were applied to Fleming-related cases in FJ Chalke Ltd v Revenue & Customs [2009] EWHC 952 (Ch) (08 May 2009).

In the aftermath of the Fleming decision, the Financial Times reported that the Treasury calculated that at least £1bn was at stake, and that the refunds would prove a further drain on the stricken public finances, although – proving that every cloud has a silver lining – they would also prove a lifeline to some businesses in the credit crunch. It now emerges that the clouds and linings might have been undercalculated, and that the value of these claims could be as high as £5bn. According to the Financial Times earlier in the week:

Revenue puts aside £5bn for VAT claims

HM Revenue & Customs has set aside nearly £5bn to deal with potential claims resulting from a legal decision last year over VAT. The department said on Monday night it had received an “unprecedented” wave of claims from about 13,000 businesses that believed they had overpaid tax to the authorities. An official said: “I don’t think we have had a similar case before. It is a rather unusual situation.”

Full details of the claims – vastly bigger than initial estimates – emerged Monday after a report by the National Audit Office revealed HMRC was setting aside £7.2bn as “provision for liabilities arising from legal claims by taxpayers”. HMRC confirmed that the bulk – £4.8bn – related to claims based on the January 2008 legal victory by Michael Fleming, an Aston Martin dealer. An unrelated £1.5bn has already been paid because of the Fleming precedent. …

The Irish cases may not reach these figures, but the Woodchester proceeding suggest that, whatever about the silver linings to businesses, the UK’s overpaid VAT clouds may yet bring storms to the Irish Revenue Commissioners as well.