Recently, I’ve been thinking about HMRC’s role in the management of taxes in the context of VAT overpayments.
When HMRC recently announced that they wouldn’t be appealing the ruling in Paymex Limited, I couldn’t get terribly excited because for the businesses concerned, it’s unlikely that they will be able to claim back the VAT overpaid, although they might loose out because they have to repay input claimed in the past.
There are two reasons for this:
• This case concerns a change in interpretation of the VAT law, which means that supplies previously treated as taxable are exempt. This affects not only the output tax charged to clients, but also the input tax recovered by the business. So the business has to repay some or all of its input tax that it has recovered in the past.
• HMRC won’t refund overpaid output tax unless the business can prove it meets stringent “unjust enrichment” rules. So HMRC gets to keep the overpaid VAT.
So you could get a situation where the business has to repay input tax reclaimed over the past 4 years because it’s supplies are exempt, but it can’t offset this against output tax that it has charged unnecessarily to it’s clients.
I don’t know about you, but those rules seem to be very much weighted in HMRC’s favour. Where’s the justice in that?
Paymex Limited and exempt supplies
Here’s the story. Paymex Limited is an involvency practitioner who provides services of arranging and supervising individual voluntary arrangements (“IVAs”). In the past, HMRC took the view that such services should be standard rated and Paymex appealed against this decision, on the basis that the services should be exempt as financial services. The Tribunal agreed with Paymex and HMRC have recently confirmed that they won’t be appealing against the decision.
Now in the longer term, this could be very good news for IPs. Although they won’t have to charge VAT on their fees, I guess that some will increase their charge out rates so that their clients end up paying just as much. So the business will benefit in the future even if the company has to restrict its input tax recovery because of making exempt supplies.
And I’m not criticising any business for doing this. Their clients won’t be paying any more in fees and there is nothing wrong with increasing charge out rates to cover loss of input tax recovery and other price increases. It’s normal business practice. HMRC are currently appealing a Tribunal decision relating to a golf club that would, if won by the taxpaper, have the effect of exempting certain playing fees for non-members. Should the golf clubs win in the long term, I’m sure that they too will benefit from increasing their non-member green fees so that the increase easily exceeds any lost input tax. And the ruling could also apply to supplies to non-members by other sporting clubs, so it could represent a significant opportunity for those businesses going forward.
But what about those “unjust enrichment” rules?
But it’s the “unjust enrichment” rules that give HMRC the advantage. In order to reclaim overpaid output tax from HMRC, businesses have to justify that they business have suffered an “economic loss”, otherwise the business must undertake to repay overcharged output tax to their customers.
In the case of retailers or other businesses dealing with a large customer base, these tasks are practically so difficult that that the businesses give up at the first hurdle and don’t even bother to make a claim. Even large businesses have had problems obtaining repayments under the scheme, so how are smaller business who don’t have the same resources supposed to be able to meet the very stringent criteria?
Even when the VAT overpayment has arisen because of HMRC’s error, businesses are still losing out.
It’s another of those situations where HMRC wrote the rules that prevent businesses obtaining “windfall profits” as a result of paying too much VAT.
So it’s a windfall profit for HMRC
So even when a business owner has followed the rules and paid his tax on time, and paid too much tax because of HMRC’s error, he still can’t recover the VAT because of the criteria which they decide. Definately a case of heads HMRC wins, tails HMRC wins. Not so much a windfall profit for the business owner, as a windfall profit to the taxman.
Somehow, it just doesn’t seem right, does it?
Marie
18 August 2011