In our blog of 27 February 2014, we commented on the decision of the First-tier Tribunal ("FTT") in Southern Cross Employment Agency Limited v HMRC. Readers will recall that in that case, the FTT allowed the taxpayers appeal and held that a comprise agreement was binding on HMRC. Please click here to read out previous blog.
HMRC appealed against the FTT's decision and the matter was recently before Mr Justice Warren sitting in the Upper Tribunal ("UT") for determination.
In 2009 Southern Cross submitted a Fleming claim to recover VAT overpaid in the periods from 1993 to 1997 on supplies of nursing staff. The basis of the claim was that the supplies were exempt from VAT. The claim was initially rejected, however, following various correspondence between the parties, in May 2010 an agreement was reached and HMRC repaid Southern Cross 74% of its claim.
Within 3 months of the repayment however, HMRC changed its position. They wrote to Southern Cross in July 2010 to advise that following the decision in Mohair (FTC/61/2011) it now considered that the supplies were standard rated and not exempt. HMRC issued a recovery assessment to clawback the 74% repayment.
Southern Cross appealed this assessment to the FTT on the basis that the repayment was made pursuant to an enforceable contract in full and final settlement. Its appeal was allowed by the FTT, for the reasons referred to in our previous blog.
By way of summary:
- Applying the ordinary principles of contract law, the FTT considered the agreement was arrived at following a process of offer, counter-offer and acceptance and was binding.
- The agreement was not ultra vires. HMRC have the power to compromise where the actual tax recoverable has not been quantified.
- HMRC therefore had no power to assess and claw-back the sums which they had paid to Southern Cross.
The UT's decision
The UT considered the same three key issues identified by the FTT, although in reverse order.
1) Did section 80 of VATA 1994 bar HMRC from entering into a binding agreement
The UT concluded that section 80 did not bar HMRC from entering into a binding agreement to settle a claim. The mechanism provided by section 80 was only intended to prevent taxpayers from seeking to recover overpayments by other remedies eg common law claims for restitution. It was not Parliament's intention to prevent HMRC from settling claims made under section 80.
The UT further commented that parties should not have to resort to litigation to achieve a binding agreement; section 85 makes provision to this effect in the context of an appeal. It therefore concluded that HMRC should be able to, if it so chooses, to dispose of claims under section 80 on a final basis regardless of whether there was a pending appeal.
2) Was the agreement ultra vires?
In the UT's view, HMRC's decision to enter into the contract was based on good intentions, having regard to relevant considerations at the time. The key question however was whether it was fatal to the validity of the agreement that HMRC did not appreciate that Southern Cross's supplies were in fact taxable.
The UT concluded that HMRC could not escape an agreement simply because the supplies had subsequently been shown to be taxable. The fact the supplies have now been found to be standard rated does not mean HMRC misdirected itself in law. At the time the agreement was entered into there was no clarity as to the VAT position and the parties could not have known with certainty the liability of the supplies in question. HMRC could not claim the agreement was invalid as a result of its failure to predict the change in law and in particular the Mohair decision.
In the circumstances, and based on the evidence, the UT found it impossible to determine whether HMRC was or was not conscious that there was doubt over the correct treatment of the supplies. In any event, had HMRC been aware that the supplies might not be exempt, the UT was of the view that that would not constitute an error of law; a state of doubt is different from a mistake.
3) Was there a binding agreement?
Finally, the UT considered whether a contractual agreement was entered into. They upheld the decision of the FTT and agreed that there was a binding agreement between the parties. Viewed objectively, the pattern of correspondence between the parties, and specific wording used, pointed to a clear process of negotiation and an intention to conclude a contractual agreement.
This decision is good news for taxpayers and provides some certainty for taxpayers who enter into VAT settlements with HMRC. The outcome confirms that HMRC cannot renege on settlements reached with taxpayers in circumstances where the law is clarified after a settlement has been reached.
In this case it was the process, not the outcome, that protected Southern Cross. The compromise agreement reached with HMRC was arrived at following a process of offer, counter-offer and acceptance. Whether a binding agreement exists between the taxpayer and HMRC in other circumstances will very much depend on the facts of each individual case.
In the light of this decision, it is clear that appropriate evidence is crucial. Taxpayers who enter negotiations for settlement or agreements with HMRC are therefore strongly advised to ensure that correspondence and discussions are carefully documented.
The judgment can be found here.