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A decision by the Court of Session in Scotland has given good news to HMRC.
The case considered by the Court of Session involved Scottish Equitable plc, and effectively reversed a decision made by a VAT tribunal in 2006.
The ruling confirmed that the three-year adjustment period for VAT errors introduced in 1996 was legally correct, once an adequate transitional period had been given for businesses to make historic claims of VAT up to the point of the law change in 1996.
This transition period was announced in the 2008 Budget, and allowed businesses until 31 March 2009 to submit claims to adjust VAT errors made between 1973 and 1997.
In effect, the Scottish court has followed the approach of the House of Lords in Fleming (t/a Bodycraft) v CRC [2008] STC 324, a case that prompted the Revenue to allow businesses to make historic claims for overpayments of tax between 1973 and 1997.
The outcome of the case is that a firm that has made long-standing VAT errors can only adjust these errors for the last four years or from 1 April 2006, whichever date comes later.
The three-year cap introduced in 1997 was increased to four years on 1 April 2009, but errors out of date as at 31 March 2009 cannot be brought in time again, hence the reason for the cap of 1 April 2006.
Independent VAT consultant Neil Warren explained, ‘The case being put forward by the appellant in the Scottish case was that the absence of the transitional period back in 1997 meant that the three year error adjustment period had never taken legal effect.
'If accepted, this could have led to a flood of extra appeals and claims for VAT rebates, which would have been very bad news for the Government’s finances.'
