© 2024 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
Procedure.Tax
For additional search results use Google and enter:
site:procedure.tax [search term]
F8. Investigation of VAT return
Implied power to verify VAT return
"[29] HMRC are a creature of statute and their powers are set out in statute either expressly or by implication. The power to verify a return is recognised in section 73(1) of VATA. There is no express power to refuse to meet a claim for payment by a repayment trader until the process of verification is completed or to amend a repayment return on completing the verification process. The power to do so, if it exists, must arise by implication. DCM argue that there is no such implication. I disagree. In my view the First-tier Tribunal, the Upper Tribunal and the Inner House were correct in rejecting DCM’s submissions on the vires question for the following six reasons." (DCM (Optical Holdings) Ltd v. HMRC [2022] UKSC 26, Lord Hodge)
​
HMRC entitled to make reasonable enquiries into claim for input credit in return
"[30] First, it is not disputed that HMRC have both a power and a duty to conduct a reasonable and proportionate investigation into the validity of claims for a refund and repayment and that HMRC are entitled to take a reasonable time to investigate claims before authorising repayment."(DCM (Optical Holdings) Ltd v. HMRC [2022] UKSC 26, Lord Hodge)
​
“The Commissioners are under a duty to conduct a reasonable and proportionate investigation into the validity of claims for a refund and repayment and a duty to act proportionately both in respect of the investigation and in dealing with the taxable person's claims generally. see R (oao Deluni Mobile Limited) v. CCE [2004] EWHC 1030 ("Deluni"). The duty to investigate is applicable both to the claim to the refund and repayment and to the question whether there is a right to set-off (or indeed a claim for a further payment from the taxable person). The duty embraces an obligation to keep all investigations under review. The Commissioners are entitled to take a reasonable time to investigate claims prior to authorising deductions and repayments and what is a reasonable time within which to complete an investigation must depend on the particular facts: Strangewood at 505. The availability and proper exercise of the Commissioners' powers of investigation are essential to maintain the fiscal neutrality of VAT and prevent refunds being made to parties not entitled to them. The postponement of repayment of input tax pending the outcome of the investigation is, as a matter of principle and subject to questions of proportionality, entirely compatible with the Sixth Directive. Whilst the burden of proof is upon the taxable person to establish that the investigation of his unadmitted and unadjudicated claim and the failure to make a part or interim payment is unreasonable or disproportionate, the burden is on the Commissioners to justify non-payment of it once the claim is admitted or established and the period of investigation of any cross-claim.” (R (oao UK Tradecorp Ltd) v. CEC [2004] EWHC 2515 (Admin), §21).
​
Verified claim takes effect retrospectively
​
“Having carefully considered both letters and the comments of Roth J at [31] of Reed Employment v HMRC we find that the letter of 2 November 2011 does constitute a claim for the purposes of s 80 VATA. Although we accept, as Lightman J recognised in UK Tradecorp Ltd, that HMRC are under a duty to conduct a reasonable and proportionate investigation into the validity of a claim, we consider that there is no reason why once it has been verified the claim, and therefore overpayment of VAT, should not apply from the date of the claim.” (Dunn & Dyer (Electrical) Ltd v. HMRC [2013] UKFTT 597 (TC), §41).
Where claim is rejected, HMRC do not need to issue an assessment
"[31] Secondly, this power and duty not being in dispute, the issue is whether after carrying out the verification process HMRC have the power to give effect to its result by intimating their decision to the taxable person to refuse to pay the claim in full or in part or whether HMRC must take one of the steps which Mr Ghosh proposed in para 26 above.
[32] Thirdly, it is implicit in section 25(3) of VATA, which I have quoted in para 25 above, that the obligation on HMRC to pay a VAT credit arises only once it is established that the VAT credit is due. There must be a VAT credit due before HMRC are under the statutory obligation to pay. The obligation on HMRC to pay does not depend solely on the say-so of the trader.
[33] Fourthly, the power and duty to verify claims for a VAT credit and to refuse to pay sums which are not due to the taxable person is implicit in the statutory statement of HMRC’s duty in para 1 of Schedule 11 to VATA which states: “[HMRC] shall be responsible for the collection and management of VAT”. The statutory powers which Mr Ghosh invokes and to which I refer in para 26 above, namely section 25(6) of and para 4(1) and (1A) of Schedule 11 to VATA and regulation 35 of the 1995 Regulations, do not exhaust HMRC’s powers. The implied power is consistent with the purpose of ensuring that the trader pays the right amount of VAT or receives the right amount of input tax that is due to it. As HMRC submit, the courts have recognised that powers are to be implied into the statutory VAT scheme to make it work. See, for example, S J Grange Ltd v Customs and Excise Commissioners [1979] 1 WLR 239; [1979] STC 183 CA (an assessment covering 21 months); University Court of the University of Glasgow v Revenue and Customs Commissioners [2003] STC 495 (CSIH) (alternative assessments); and BUPA Purchasing Ltd v Customs and Excise Commissioners [2007] EWCA Civ 542; [2008] STC 101 (amendment of basis of assessment)." (DCM (Optical Holdings) Ltd v. HMRC [2022] UKSC 26, Lord Hodge)
​
Duty to process expeditiously
"[30]...HMRC are under a duty to process the claim expeditiously, but non-cooperation by the taxable person may delay the conclusion of the investigation and may oblige HMRC to reject the claim: Tradecorp, para 24."(DCM (Optical Holdings) Ltd v. HMRC [2022] UKSC 26, Lord Hodge)
Challenge by judicial review
​
"[45] This does not mean that a taxable person is left without a remedy if HMRC’s verification is not expeditious or proportionate. It has long been established that HMRC are subject to the rules and principles of public law and they are amenable to judicial review: R v Inland Revenue Commissioners, Ex p National Federation of SelfEmployed and Small Businesses Ltd [1982] AC 617; R v Inland Revenue Commissioners, Ex p Preston [1985] AC 835, 862 per Lord Templeman. If HMRC were to act in a dilatory manner in carrying out their verification of a trader’s claim for a VAT credit or in a disproportionate manner, a taxable person could make an application for judicial review to achieve effective judicial control over the action or inaction of HMRC: Tradecorp, para 25. Further, the trader would have an appeal against an adverse decision by HMRC under section 83(1)(b) or (c) which provides that an appeal to the First-tier Tribunal lies in respect of “VAT chargeable on the supply of any goods or services” and “the amount of any input tax which may be credited to a person”." (DCM (Optical Holdings) Ltd v. HMRC [2022] UKSC 26, Lord Hodge)
​
Decision to refuse claim not subject to assessment time limits
"[35] It is true, as Mr Ghosh submits, that a payment trader which, in the opinion of HMRC, overstates its input tax or understates its output tax, thereby reducing the VAT which it has to pay, is nonetheless initially required to pay only the sum which it discloses in the VAT return and it is up to HMRC to issue a timely assessment to Page 13 recover the VAT which the trader should have paid. A repayment trader by contrast may receive nothing until the expeditious verification process, which HMRC are required to conduct, is completed. There is a potential therefore for HMRC to run out of time to make an assessment of VAT due to them when verifying the claims of a payment trader because of the time limits in sections 73 and 77 of VATA while the time allowed for the expeditious verification of a repayment claim might, depending on the circumstances of the case, extend beyond those limits, not least where, as here, the trader has been uncooperative.
[36] I am not, however, persuaded that the difference of treatment amounts to unjustified discrimination.
[37] HMRC’s entitlement to carry out an expeditious and proportionate verification of a claimed VAT credit is consistent with EU law relating to VAT: see Enel Maritsa Iztok 3 AD v Direktor ‘Obzhalvane I upravlenie na izpalnenieto’ NAP (Case C-107/10) [2011] ECR 1-03876; ECLI:EU:C:2011:298, para 53.In that case, again in para 53, the Court of Justice of the European Union stated that the taxing authorities had the power to extend the statutory period in which refunding of excess VAT was to be made in order to carry out a tax investigation and that the authorities would comply with the principle of fiscal neutrality if they compensated the trader’s economic disadvantage through being temporarily kept out of its money by the payment of interest which was otherwise normally payable under the relevant legislation. "(DCM (Optical Holdings) Ltd v. HMRC [2022] UKSC 26, Lord Hodge)
​