Between 1990 and 2004, the taxpayer accounted for output tax on ticket sales that should have been treated as exempt. Between 2000 and 2001, the taxpayer received various repayments of input tax including in relation to the ticket sales. The repaid input tax exceeded the overpaid output tax. In 2006, the taxpayer claimed repayment of the overpaid output tax for those overpayments not time barred. By that point, HMRC was strictly out of time to claim the input tax wrongly repaid.

HMRC denied the taxpayer’s repayment claim because, it contended:

  1. such repayment would be contrary to the relevant directive at the time (EC Council Directive 77/388); and
  2. section 81(3A), Value Added Tax Act operated to reduce the amount repayable (in summary, section 81(3A) applies if HMRC is liable to repay VAT to a person due to a mistake, but that mistake also resulted in that person not being assessed to VAT.)

The First-tier Tribunal and Upper Tribunal held that HMRC was entitled to deny the repayment claimed by the taxpayer. The taxpayer appealed to the Court of Appeal.

The Court of Appeal rejected the taxpayer’s appeal and upheld the earlier decisions. It held that where section 81(3A) applies, any time limits imposed on HMRC for recovering a repayment made in error are disregarded in determining whether such sum should be set off against

any overpayment. Essentially, section 81(3A) seeks to undo all consequences of the original mistake. Accordingly, the taxpayer’s claim for repayment of overpaid output tax could, under section 81(3A), be set off against the repayment of input tax wrongly made notwithstanding that HMRC’s claim for repayment was time-barred. HMRC’s ability to “pick and choose” the time- barred periods was not, as the taxpayer had contended, contrary to EU law and was consistent with the EU principle that a taxpayer must take the rough (no right to deduct) with the smooth (exemption).

Encouragingly, however, the decision makes clear that section 81(3A) can only be used to discharge HMRC’s obligation to repay; it cannot result in a taxpayer paying more.

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