19058

INPUT TAX – Claim for recovery more than 3 years after overpayment – Officer of HM Customs & Excise who inspected first return failed to notice error – Appeal on basis duty of care owed to Appellant – Appeal dismissed

LONDON TRIBUNAL CENTRE

	THE WINE PORTFOLIO COMPANY LTD	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:        MISS J C GORT  (Chairman)
						MRS C HOWELL 

Sitting in public in Bristol on 18 March 2005

Mr Tim Garland, a director of the Appellant company, for the Appellant 

Miss E Mitrophanous, instructed by Sheppard & Wedderburn, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	The appeal is against a decision of the Commissioners to refuse part of the Appellant’s claim to recover input VAT pursuant to sections 25 and 26 of the Value Added Tax Act 1994 and regulation 29(1A) of the Value Added Tax Regulations 1995.  The disputed sum is £13,233.72.

2.	The background facts to this case are that the Appellant was registered for purposes of value added tax with effect from 1 February 1995.  On 12 January 1995 an officer of HM Customs and Excise carried out an initial visit.  He inspected the Appellant’s records and accounts, and the only return that was then available for inspection.  That officer was apparently satisfied with the Appellant’s methodology in accounting for VAT and did not suggest that it be changed.  In the amended Statement of Case the Respondents record that: “From its basic inspection it appeared that the Appellant had dealt with its first VAT return correctly and no further investigation was needed.”

3.	The Appellant is a small family business importing wines and distributing them through the United Kingdom. Mr Garland and his wife ran the business, and also employed a part-time book-keeper. Neither Mr Garland nor his wife had any previous experience of dealing with VAT. The book-keeper was responsible for completing the returns.  A firm of accountants was employed to do the annual accounts.

4.	By a letter dated 8 August 2000 Mr J A Gordon Stewart, F.C.A., the Appellant’s accountant, wrote to the Respondents in the following terms:

“This company has always used Octavian Ltd of Corsham Wiltshire to store its wine in bond and it is their invoices which have caused some confusion and led to the omission of VAT on purchases.  These invoices are complicated as they contain excise duty, acquisition VAT and normal VAT. Acquisition VAT has been correctly computed and included in box 2 in each quarter.  However normal VAT due has been omitted on each return from box 4.”

“Attached are schedules showing the total omitted from each return quarter by quarter since February 1995.  The total for the years to 31 July 2000 is £33,045.40.”

It was accepted by the Appellant that normal VAT had been properly dealt with but that acquisition VAT had been omitted from each return.

5.	The Commissioners accepted that they were liable to repay to the Appellant the sum of £19,816, and this was promptly paid.  The remainder of the sum claimed, £13,233.72, was rejected on the grounds that the claim was made more than three years after that amount of the overpayment was made.  The appeal related to this latter sum.  

6.	The Appellant had correctly noted its acquisition VAT in respect of all VAT due on all goods and services from other EC Member States in box 2 of the return, but it had failed then to add this figure to the “normal” input VAT claimed as input tax in box 4.  As a result, it had over-calculated the amount of tax due on each of its quarterly returns.  

7.	Letters of 26 September 2000 and 5 December 2000 written respectively by the Appellant’s representative and the Appellant were treated as a request for local reconsideration.  This reconsideration upheld the decision to limit repayment and the Appellant was notified of that decision by a letter dated 18 December 2000.  The sole basis for refusing the claim for repayment was that the claim fell outside the time limits.  The reconsideration officer was of the view that the relevant time limits were set out in section 80(4) of the VAT Act and that a right of appeal lay under section 83(t) of the Act to the Tribunal. The Appellant subsequently appealed stating that it was seeking a refund in respect of an overpayment of tax. It was the view of the Commissioners that the Appellant’s claim for repayment should properly be characterised as a claim for repayment of under-claimed input tax, rather than overpaid VAT. It therefore followed that the claim should have been brought in accordance with the provisions of regulation 29 of the Value Added Tax Regulations 1995, S.I. 1995/2518. The Commissioners contended that if the letter of 8 August 2000 were treated as a claim for under-claimed input tax under regulation 29(1) in respect of the sums in dispute, such a claim was still made more than three years after the date by which the return for the prescribed accounting period in which the VAT became chargeable was required to be made; it was statute-barred by virtue of regulation 29(1A) of the VAT Regulations.

8.	The hearing of this appeal was postponed to await the return of the reference in Marks and Spencer Plc from the European Court of Justice, and for the Court of Appeal to consider the extent to which the principles derived from that case in the European Court fell to be applied in the context of the three-year cap provided by section 80 of the VAT Act and Regulation 29(1A).

9.	By its letter of 5 December 2000 the Appellant contended that:

(i)	The business had been inspected by the Commissioners after the first incorrect return was submitted.  No point was taken on this by the visiting officer;

(ii)	The Commissioners compared business partners and should have observed that the Appellant was paying more VAT than usual;

(iii)	The Commissioners owed the Appellant a duty of care to ensure it was not paying too much VAT;

(iv)	The Commissioners have received a windfall;

(v)	No interest has been paid on the refunded sums.

The Appellant’s case before the Tribunal rested entirely on the issue of the inspection of the first VAT return by the officer on 12 June 1995.  

10.	Regulation 29(1) and regulation 29(1A) provide as follows:

“(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 three years after the date by which the return for the prescribed accounting period in which the VAT became chargeable is required to be made.”

11.	Regulation 29(1A) was inserted in the VAT regulations with effect from 1 May 1997, by virtue of regulation 4 of the VAT (Amendment) Regulations  1997, SI 1997 No.1086.  Regulation 29(2) sets out the documentary requirements which a taxable person must satisfy prior to making a claim for input tax.  The regulations governing a claim for repayment of overpaid VAT can be found in regulation 34ff of the VAT regulations.  This provides that a trader may correct an over-declaration of liability by amending his VAT account provided inter alia that a period of three years or more has not elapsed since the filing of that return.  If the other conditions set out in regulation 34 are not met, then the trader must rely upon regulation 35 which provides that:

“Where a taxable person has made an error –

(a)	in accounting for VAT; or 

(b)	in any return made by him, then, unless he corrects that error in accordance with regulation 34, he shall correct it in such manner and within such time as the Commissioners may require.”

12.	Section 80 of the Value Added Tax Act provides that:

(1)	Where a person has (whether before or after the commencement of this Act) 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.

13.	The facts were not in dispute, and an agreed statement of facts was provided.  Whilst the officer who had made the visit in 1995 did not appear, the Tribunal was provided with his report on the visit. From this it appears that all the relevant documents, including the one VAT return were checked by him. He specifically refers to checking the acquisition tax to the purchases invoices through to the agents’ listing and to being satisfied with that. The only matter he was not satisfied with related to a few invoices which did not fall within the six months prior to the effective date of registration and these invoices were disallowed. The officer concluded by stating that it was too early to assess the credibility of the business but the checks made did not point to any risk to the revenue.  Apart from the invoices between July and October 1994 which were disallowed, the officer expressed himself satisfied with all the other checks.  

14.	Mr J McCubbin the Appeals and Reconsiderations officer, gave evidence to the Tribunal of the following. The nature of the visit was to clarify the overall accuracy of the return, but was not a full audit.  All VAT returns had guidance notes which explained how a taxpayer should complete the form.  It was often the case that the VAT inspector would have had no particular knowledge of the Appellant’s business.  Mr McCubbin accepted that approval of the first Vat return was important and that verification of any VAT return was important in the context in which it was being submitted.  He stated that verifying that the right amount of tax is being declared was part of the Commissioners’ responsibility. He continued: “It is an equal responsibility to examine whether a taxpayer is paying too much or too little. A lot of over-declarations are uncovered by our officers.  If he finds an obvious area in the records he will notify the taxpayer.” Mr McCubbin said that in the present case he would have expected to have picked up the error in question and to have told Mr Garland about it.   It was the role of the inspector to examine the business records and look at any areas of risk to the revenue.  Because the potential for risk on a first visit was less, as there were fewer records, any errors should be more obvious.

15.	The Respondents’ case was that the inspector was not there to carry out a full audit.  It was not reasonable for the Appellant to rely on the inspection, the Appellant’s own book-keeper and accountant had missed the error as well.  It was also not clear to what extent the Appellant had relied on the VAT inspector.  The tax was a self-assessment tax and it was the Appellant’s business to get it right, not the Commissioners.  The primary aim of the visit was to consider the risk to the revenue.  

16.	It was submitted that the Commissioners had done nothing wrong, and that the cap was necessary in order to have certainty in the law.  

The Appellant’s case

17.	It was quite properly not argued by the Appellant that as a matter of law the Commissioners were obliged to repay the amount they had received as a consequence of the Appellant’s error.  It was however the Appellant’s case that it was entitled to rely upon the inspection carried out by the officer in 1995 and the effect of that visit was to confirm that they were properly completing their VAT returns.  It was implicit in the Appellant’s case that they had a legitimate expectation that in checking the return the inspector would inform them of any error in that return.  It was specifically submitted that the Commissioners owed a duty of care in the particular circumstances. The Appellant relied on the unjust enrichment of the Commissioners in circumstances where they had received by way of tax moneys which were not due to them.  

Reasons for decision

18.	The Appellant did not dispute that the Commissioners were entitled to apply the cap as a matter of law, and we accept that that is the case.  It is however also the case that this Tribunal has no jurisdiction in the present circumstances. We are not able to adjudicate on such matters as legitimate expectation and duty of care.  

19.	Value added tax is a self-assessing tax, and taxpayers have never been able to rely on mistakes made by those in their employment or otherwise paid by them, to excuse any errors made in accounting for their value added tax.  In the present case it was not only the VAT inspector who overlooked the Appellant’s error, but also the Appellant’s book-keeper and his accountant.  

20.	However, we note Mr McCubbin’s comments, and that he would have expected the error to have been picked up.  In addition he considered it the duty of an inspector to note such an error and to inform the taxpayer.  He accepted that in the present circumstances, where there was only one return to be inspected, it would be that much easier to do so.  In the very particular circumstances of this case therefore we recommend to the Commissioners that they consider exercising their discretion in favour of the Appellant, given in particular that no sort of precedent would be set by this, and the Appellant would not be advantaged at the expense of other taxpayers.  At present it is the Commissioners who have been advantaged by the receipt of a sum of money to which they were not entitled at the time they received it.  Had their inspector done his job as was to be expected, then they would never have received this windfall.

21.	In all the circumstances this appeal has to be dismissed.  No order for costs.

MISS J C GORT
CHAIRMAN

RELEASED: 29 April 2005

LON/01/0095