How HMRC was wrong, even when it was right

What happens when HM Revenue and Customs (HMRC) tries to recover  VAT that was claimed in 1997 by issuing an assessment in December 2000?

What was the VAT issue?

Grant Thornton has recently helped a private healthcare client to successfully dispute the validity of an assessment at the VAT Tribunal.

Back in 1997, a number of private hospital operators entered into prepayment arrangements for drugs and prostheses, with the aim of mitigating against a future change in VAT legislation that would have prevented the recovery of VAT incurred on those purchases. As a result of the arrangement, a significant claim was included on a VAT return at the end of 1997.

Between 1998 and 2000, HMRC carried out inspections and corresponded with the client. Eventually an assessment for the VAT previously claimed was issued in December 2000. 

Although the assessment was issued a number of years ago, for various reasons the appeal against it was only concluded recently.

What are the time limits for VAT assessments?

The statutory time limits for HMRC to issue a VAT assessment are currently:

• 2 years after the end of the VAT period in which the error occurred, or
  
  
• 1 year after evidence of fact, sufficient in the opinion of HMRC to justify the issue of an assessment, comes to its knowledge

but in any case not more than 3 years after the end of the VAT period.

Why was the appeal decided in the taxpayer's favour?

Despite the substantive point of the case having previously been found in HMRC's favour by the European Court of Justice, the key issue for the Tribunal to decide was whether HMRC had discovered evidence in 2000 of which it had previously been unaware, thereby entitling it to raise an assessment at that time.

The Tribunal found that was not the case, and determined that evidence gained by the tax authority in 1998 and 1999, together with knowledge already in its possession regarding the use of prepayment arrangements, provided it with sufficient evidence of fact. Consequently, any assessment raised after 31 December 1999 was time barred.

Karen Robb, VAT Partner at Grant Thornton says: "HMRC challenged the structure and began to review it through a series of inspections. However what HMRC failed to do in this instance was to abide by its own deadlines and as such did not issue the VAT assessment within the relevant statutory time limits. By failing to do this, although the substance of the assessment was correct in law, it was invalid."

Robb continues: "The message is clear that taxpayers should be aware that time limits apply equally to HMRC and if assessments are not issued within the appropriate time limits, they will be time barred. Taxpayers should always review the timing of assessments, especially where there has been a protracted dispute."

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