On 1 April 2015, the Upper Tribunal (in HMRC v Southern Cross Employment Agency Ltd2) held that a compromise agreement entered into between HMRC and the taxpayer in respect of overpaid VAT was valid and binding, despite it subsequently emerging that, as a matter of law, no VAT had been overpaid.

The taxpayer, an employment agency, supplied dental nurses to dental practices.

The taxpayer made a claim for repayment of VAT pursuant to section 80 VATA 1994, in respect of its services supplied between 1973 and 1997. HMRC resisted the claim, on the grounds that the taxpayer would be unjustly enriched by receipt of a VAT repayment, before ultimately (after correspondence with the taxpayer’s advisers) suggesting a “compromise” position on a “without prejudice basis”. After further negotiation, a repayment amounting to 74% of the taxpayer’s claim (plus interest) was agreed.

Less than three months after agreeing the compromise, HMRC wrote to the taxpayer stating that no repayment should have been made. HMRC had now received legal advice that the taxpayer’s supplies were, in fact, taxable. HMRC raised an assessment for the repaid amount.

The Upper Tribunal, rejecting HMRC’s appeal, held that:

  • The language of section 80 VATA 1994 did not prevent HMRC from entering into compromise agreements in respect of claims for repayment of overpaid VAT.
  • The agreement in this case was not ultra vires. At the time of the agreement there was genuine uncertainty as to the correct VAT treatment of the taxpayer’s supplies.
  • The agreement was valid and binding.

The decision is welcome as it confirms compromise agreements relating to VAT should be viewed in the same way as those relating to direct taxes. Taxpayers will welcome this decision, as allowing HMRC to renege on compromise agreements could have had wide-ranging implications for the way in which taxpayers and HMRC settle disputed matters (and the certainty taxpayers have that such agreements will be honoured).

The decision can be found here.