In Coin-a-drink Limited v HMRC4, the First-tier Tribunal (FTT) considered the ability of HMRC to impose corporation tax on repayments of overpaid VAT and associated interest in the light of EU law.
Coin-a-drink Limited (CAD) operates a wide range of full service automatic food beverage and snack vending machines which it supplies to its customers.
The background to the claim was not disputed. For many years all sales made through vending machines were treated as liable to VAT at the standard rate. However, following Compass Contract Services UK Limited5, HMRC had accepted that the sale of cold food from vending machines, in addition to tea and coffee sales up to 1 May 1984, should have been zero-rated rather than standard rated. Accordingly, CAD submitted a claim to recover overpaid VAT on supplies of hot drinks up to 1 May 1984.
HMRC accepted CAD’s claim and repaid the overpaid VAT together with statutory interest6, in the total sum of £1,360,682.
CAD recognised the repayments and interest in accordance with relevant GAAP, however the amounts were excluded from CAD’s profit and loss account for the period 1973 to 1984. HMRC subsequently opened an enquiry into CAD’s return and requested payment of corporation tax on the repaid VAT and interest.
The main dispute concerned whether the imposition of corporation tax on the repayment and interest was in breach of EU law.
The parties were in agreement that if considered solely in the light of UK law, the appeal must fail, following the decision in Shop Direct Group and others v HMRC7. However, CAD relied on EU law in support of its case, such arguments having not been considered in Shop Direct Group.
CAD sought to rely on a “mistake-based” restitution claim, in relation to the repayment and the associated interest. It submitted that by virtue of the operation of EU law, section 80(7) of the Value Added Tax Act 1994 (VATA) should be disapplied to allow CAD to pursue its mistake-based claim. It was argued that a central principle of restitution is that the party unjustly enriched should disgorge all the benefits he has received. HMRC could not therefore impose a corporation tax liability, as to do so would not disgorge all the benefit it had obtained as a consequence of the overpaid VAT.
HMRC’s primary argument was that the VAT repayment and interest arose from simple statutory claims and EU law did not require section 80 VATA to be disapplied. In the alternative, HMRC submitted that even if the claims were restitutionary in nature, the position would still be the same. The imposition of corporation tax simply represented a delayed working through of the normal statutory rules.
The FTT’s decision
The FTT dismissed the taxpayer’s appeal.
In reaching its conclusion, the FTT considered the true legal character of the payments and whether they were statutory or restitutionary in nature.
The FTT concluded that the VAT repayment was made exclusively pursuant to section 80 VATA and could not be characterised as a payment made in respect of a mistake-based restitution claim. It considered that section 80 provided a complete and EU law compliant remedy to enable the recovery of overpaid VAT and satisfied the taxpayer’s EU law “San Giorgio” right to repayment. No disapplication was required and accordingly, the claim could not be characterised as a mistake-based restitution claim. The decision in Shop Direct therefore applied and a corporation tax liability on the repayment was due.
In relation to the interest payment, the FTT held that this was made exclusively pursuant to section 78 VATA and could not be characterised as payment in respect of a mistake-based restitution claim. Whether the interest payment represented an “adequate indemnity” remained to be determined8 and it was not within the FTT’s jurisdiction to decide that point.
For any taxpayers claiming repayments and interest (including those with pending compound interest claims) this is an important decision. In the view of the FTT, HMRC is able to impose a corporation tax liability in respect of amounts of repaid VAT and associated interest.
The decision has added significance given that the government has included in the Finance Bill 2015 provisions which introduce a new special rate of corporation tax for restitution interest paid by HMRC to companies. Where certain conditions are satisfied, interest payable by HMRC will be treated as restitution interest and subject to a 45% corporation tax charge.
The FTTs decision is available to view here.