The recent case of Southern Cross Employment Agency Ltd v HMRC1 considers HMRC’s ability (or, in certain cases, its inability) to revoke a decision after a claim has been finalised and paid. The First-tier Tribunal (Tax Chamber) (FTT) held that relatively informal correspondence between HMRC and Southern Cross Employment Agency Ltd (Southern Cross) did amount to a binding agreement, and therefore HMRC was unable to renege on its original decision.
Southern Cross was an employment agency which supplied dental nurses to dental practices. It initially 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 in VATA 1994, Schedule 9, Group 7.
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 the Fleming2 case, Southern Cross also claimed repayment of VAT for the period from 1973 to 1977.
Initially, HMRC agreed that Southern Cross’ supplies were exempt from VAT, however, it also argued that if the output tax were to be repaid in full, Southern Cross would be unjustly enriched as part of the costs suffered had been passed on to its customers. Needless to say, Southern Cross disagreed with this contention and correspondence was entered into to further debate the point.
Following correspondence and subsequent meetings, HMRC proposed a compromise agreement, or settlement, whereby it was prepared to meet a repayment of 50% of the total claim. Southern Cross responded with a figure of 74% plus interest. This was agreed by HMRC, and the repayment was made accordingly.
Within three months of the repayment, however, HMRC wrote to Southern Cross to inform it that its position had changed; supplies of staff did not constitute care, or medical care, and therefore Southern Cross’ supply of dental nurses did not fall into the exemption contained in VATA 1994. HMRC issued an assessment under section 80 (4A), VATA 1994, to claw back the 74% repayment.
Southern Cross appealed this assessment to the FTT. Although it accepted that section 80 (4A) permitted HMRC to issue such an assessment, it argued that this option was only available to HMRC in the absence of an enforceable contract. Southern Cross argued that there was an enforceable contract, and that HMRC’s payment had been in full and final settlement.
In coming to its decision, the FTT considered three key issues:
- Had HMRC and Southern Cross entered into a binding compromise agreement?
- If so, was that agreement ultra vires because HMRC had no power to enter into such an agreement?
- If there was a valid compromise agreement, was HMRC entitled to make the assessments under appeal to claw back the sums paid?
- Was there a binding compromise agreement?
In determining this point, the FTT applied “the ordinary principles of contract law”, and concluded that there was a binding compromise agreement. As with ordinary commercial parties, one side must have made an offer, the other must have then accepted it, and both parties must have done so with an intention to commit contractually. The FTT held that correspondence between HMRC and Southern Cross demonstrated the requisite intention to commit contractually. Southern Cross had offered terms of settlement (74% of the claim, plus interest) which had been accepted by HMRC.
- Was the agreement ultra vires?
Having concluded that there was a binding compromise agreement, the FTT then had to consider whether HMRC had the power to enter into such an agreement in any event. It was held that whilst “HMRC have no power to agree to take a smaller sum for tax than is lawfully due on the information available”, it does “have the power to compromise where the actual tax recoverable has not been quantified”. The FTT therefore concluded that the compromise agreement was not ultra vires; it remained valid, regardless of the fact that as a matter of law VAT was due, as this was something that could only have been determined with hindsight.
- Was HMRC entitled to claw back the sums paid?
Finally, the FTT had to consider whether HMRC was entitled to assess under section 80(4A) or section 78A(1) VATA 1994 to “claw-back” the payments. The FTT distinguished between cases where HMRC is liable (whether through statute, judicial determination, deemed judicial determination, or a valid and enforceable agreement) to repay an amount, such as voluntary payment of a claim, and where HMRC is not liable, because the liability has not arisen as a matter of law. As was the case here, HMRC has no power to recover amounts that fall into the former category, and therefore in the FTT’s view HMRC could not claw-back the sums which it had paid to Southern Cross.
In view of the above conclusions, Southern Cross’ appeal was allowed.
This decision provides helpful guidance on the enforceability of compromise agreements, however informal they may at first sight appear to be. The FTT interpreted the correspondence between the parties as amounting to a binding agreement, and as being in full and final settlement, despite this not being expressly stated by the parties. As Judge Berner commented: “It was not necessary for there to have been express wording to that effect.” It is important to appreciate, however, that whether a binding settlement agreement exists between the taxpayer and HMRC, will very much depend on the facts of the individual case under consideration.
To read the decision click here.