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THE CASE

Leicester Co-operative Society Ltd (“Leicester”) transferred all its assets in March 1995 to Midlands Co-operative Society Ltd (“Midlands”). In June 2003, Midlands submitted to HMRC two Voluntary Disclosure claims to recover overpaid VAT relating to periods between April 1973 and November 1999.

HMRC famously refuses to repay VAT to businesses whose name is not on the relevant VAT documents. For example, if a business pays VAT to a supplier on a purchase, but the supplier fails to issue address its invoice to the business, then the business is usually prevented from recovering the VAT it paid on that purchase. In this case, too, HMRC refused to repay the VAT to Midlands on the grounds that the VAT reclaim belonged to Leicester. The VAT Tribunal agreed with HMRC.

However, the High Court agreed with Midlands. The Court found nothing in the law to prevent the transfer from one business to another of the right to receive a specific VAT repayment from HMRC.

THE CONCLUSION

Various VAT planning points might have arisen from this case. But before any new ideas could be discussed with HMRC, Business Brief 31/08 was issued. An amendment to UK VAT law is proposed, stating that HMRC “must set the transferred sum against a sum payable to them by the original creditor if they would have had an obligation to do so … had the original creditor retained the right.”

HMRC are closing off the possibilities of avoiding “set-off” mechanisms (so the transferor’s outstanding VAT liabilities will still be deducted from the VAT reclaim) and “unjust enrichment” charges (e.g. where reclaimed VAT cannot be passed on to those customers who overpaid). But the case still raises some further interesting avenues for exploration.

For example, this case apparently supports the idea that retrospective VAT reclaims can be made for activity on a VAT registration number prior to a “Transfer of Going Concern”. But is it also possible to protect a VAT reclaim by assigning it away before the business originating the claim goes out of business and is dissolved? Still more importantly, what would happen if the right were assigned away before the supplier issues the relevant VAT invoice? Could the invoice be validly addressed to the assignee; and if so, could this be used as a justification for recovering VAT paid on disbursements?

These are ideas to be explored with HMRC. If you are interested in attempting to recover VAT paid on purchases, please contact us for our initial views: info@intrust-manx.com