In HMRC v Southern Cross Employment Agency Limited5 , the UT has confirmed the decision of the FTT, that a compromise agreement made by HMRC was a binding agreement which was not ultra vires its powers and must stand.


Southern Cross Employment Agency Limited (Southern) was an employment agency which supplied dental nurses to dental practices. Initially, it paid VAT on such supplies. It subsequently made a claim for the repayment of the VAT that had been paid, claiming that the VAT was not, and had not been, due as the supply of nurses was exempt under the medical exemption contained in Schedule 9, Group 7, VATA.

Southern Cross’ claim for repayment was made in 2001 and due to limitation constraints, was made only for the period from 1998 to 2000. In 2009, however, following Fleming6 , Southern Cross also claimed repayment for periods from 1973 to 1997.

HMRC sought to deny repayment of VAT on the grounds that Southern would be unjustly enriched. In a letter dated 26 March 2010, HMRC proposed a compromise, under which HMRC would pay 50% of the amount claimed. In its reply, dated 14 April 2010, Southern rejected this offer but indicated that it would accept 74% plus interest. HMRC agreed on 29 April 2010, and payment to Southern was duly made.

On 23 July 2010, HMRC attempted to rescind the agreement, arguing that the supplies were in fact taxable and that Southern had been correct to charge VAT in the first place. It followed this up with an assessment for the VAT it had repaid only three months earlier.

Southern appealed to the FTT7 . It accepted that its services were properly taxable following Moher v HMRC8 , but claimed that HMRC was not entitled to renege on the agreement it had reached. The FTT, finding in favour of Southern, concluded that HMRC and Southern had entered into a binding compromise agreement which was not ultra vires HMRC’s powers and as a consequence, HMRC was not entitled to reclaim the repayments under section 80(4A) VATA.

UT’s decision

The UT upheld the FTT’s decision and dismissed HMRC’s appeal. The UT was of the view that:

  • section 80 did not preclude HMRC from entering into compromise agreements relating to repayments of overpaid VAT
  • a valid compromise agreement had been entered into by HMRC and Southern
  • an agreement was not ultra vires if it was agreed at a time when there was uncertainty as to the correct VAT treatment of a supply and it later transpired that the agreed repayment was not, in fact, legally due.


As noted by the UT, permitting HMRC to renege on agreements if the correct VAT treatment is established at a later date could have had a wide-ranging impact on agreements entered into by other public bodies. In finding that HMRC is able to enter into binding agreements, outside the scope of section 85 VATA, the UT has aligned the positions for VAT and direct tax.

Taxpayers will, therefore, be reassured by the UT’s decision. This decision should lead to greater certainty for taxpayers, although it remains to be seen whether HMRC’s response to this decision will be greater reticence to entering into compromise agreements in the future.

To read the decision click here.