In Milton Keynes Hospitals NHS Foundation Trust v HMRC  EWCA Civ 942, the Court of Appeal decided that HMRC was entitled to issue an assessment under section 73(2), Value Added Tax Act 1994 (VATA), to Milton Keynes Hospitals NHS Foundation Trust (the Trust), claiming repayment of amounts wrongly refunded to the Trust under section 41, VATA. The amount in issue related to VAT paid by the Trust in relation to a new computer system, which it reclaimed from HMRC. HMRC took the view that it was wrongly reclaimed and sought to recover the amount in question. The issue before the Court of Appeal was whether HMRC was entitled to rely upon section 73(2). Both the First-tier Tribunal (FTT) and the Upper Tribunal (UT) had decided that HMRC was so entitled. The Trust argued that HMRC’s power to make an assessment under section 73(2) does not apply where the person to whom the refund was made under section 41(3), VATA, is not a taxable person as regards the supplies which were the subject of the refund. The Trust argued that the effect of Council Directive 2006/112/EC (the Principal VAT Directive) and the domestic legislation implementing it, is to put a public body performing statutory (non-business) functions outside the VAT scheme. Section 73(2) refers to a VAT assessment in respect of "any prescribed accounting period"; the Trust argued that someone who is not a taxable person does not have any prescribed accounting periods and therefore section 73 can only apply to VAT incurred by a person when acting as a taxable person. The Court of Appeal dismissed the Trust's appeal, for the following reasons:
- The Trust was a taxable person, as it did in fact make supplies which fell within the scope of VAT and it was required to be registered in order to take advantage of the public sector refund scheme.
- A claim for a refund of the relevant VAT must be made on the same form as the ordinary VAT return, which must be made by reference to prescribed accounting periods. The power to claim a refund is therefore inextricably linked to the obligation to make returns by reference to prescribed accounting periods, which the Trust did.
- The obvious purpose of the reference to prescribed accounting periods is to lay down the administrative machinery for claiming refunds and to trigger the running of time under section 73(6), which limits HMRC’s power to make retrospective assessments.
- It is not correct that public sector bodies are “scoped out” of VAT. They are outside the European framework for VAT, but they are firmly within the domestic framework. For the purpose of participating in the refund scheme, they are taxable persons.
- The Trust's interpretation would undermine the policy underlying the scheme for refunding the relevant VAT and the policy of ensuring that a public sector body does not retain more than its fair share of public funds.
- The Trust's argument would mean that the procedural mechanics of reclaiming a refund of VAT wrongly paid would triumph over the substance of the right to recover public money which should not have left the consolidated fund.
Why it matters: The validity of HMRC's decision to issue the relevant assessment was not in issue in this case and will be dealt with separately. However, the Court's affirmation of the decisions of both the FTT and UT will be of wider significance in other cases where HMRC has sought to issue assessments in respect of VAT overclaimed by public bodies under the public sector refund scheme.
The judgment can be viewed here.