In the recent case of Copthorn Holdings the FTT considered the circumstances when it might be appropriate for HMRC to exercise its discretion to allow retrospective additions to VAT groups.


The dispute resulted from several errors made by various companies in the Copthorn group, which led to the group suffering a forfeiture of a deduction for input tax in excess of £2m. The group mistakenly believed two companies (C26 and C28) were members of the group when they were in fact not, and accounted for VAT on this mistaken basis. The mistaken belief had been caused by a change in staff and HMRC accepted that the mistake was genuine.

This was a second challenge by Copthorn of a decision taken by HMRC not to exercise its discretion to sanction the retrospective inclusion of two companies into the relevant VAT group. In an earlier decision on the same matter, the FTT had asked HMRC to reconsider its decision, expressing concerns regarding HMRC’s published policy that prescribed only limited circumstances in which HMRC would exercise its discretion to backdate the inclusion of companies in a VAT group. Approximately a year later, HMRC concluded its reconsideration. It made only minor changes to the published policy and again refused to accept Copthorn’s application. Copthorn therefore appealed to the FTT.

In this second challenge, Copthorn argued that HMRC’s policy was still too restrictive of the discretion provided by Parliament to HMRC to backdate the inclusion of companies in a VAT group. It also argued that given the group’s mistake had resulted in incoherent tax liabilities, it was unreasonable for HMRC not to exercise its discretion.

The FTT’s decision

The FTT agreed with Copthorn and remitted the matter back to HMRC a second time for further consideration.

Whilst HMRC’s modified policy had purportedly dealt with the earlier decision, the FTT considered that the policy was substantially unchanged. It held that HMRC’s published statement significantly fettered the discretion granted to HMRC in an unacceptable manner.

The FTT acknowledged the limits of its jurisdiction and noted that it was for HMRC to produce policy and general guidelines. However, the FTT proceeded to make a number of suggestions in relation to what it felt should and should not be considered. It explained that the policy should distinguish between cases in which groups simply change their mind and those where companies are assumed to have been in group registrations, when in fact they were not. The policy should also take into account the likely tax and cost consequences of the mistaken assumption for the group.

HMRC placed considerable reliance on the fact that notwithstanding it had provided Copthorn with lists on four separate occasions of the companies believed to be included within the group registration, there had been considerable delay by it in making the application for retrospective inclusion in the group. The FTT was of the view that this was irrelevant. The FTT said it was understandable that anyone receiving the lists may not have detected the errors. In addition, it was not satisfied HMRC’s treatment of the application would have been different had the lists lead to an earlier application.


The FTT did express some hesitation in remitting the matter back to HMRC for a second time as it was not satisfactory for the matter to be simply batted to and fro between the FTT and HMRC. However, the FTT had a duty to consider Copthorn’s further appeal in a fair and just manner and a second remittance was necessary.

If HMRC takes heed of the FTT’s suggestions, a more flexible solution may be available to companies which have made costly administrative VAT grouping errors.

A copy of the FTT’s decision is available to read here.