First Agency Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 12 July 2018 |
| Neutral Citation | [2018] UKFTT 391 (TC) |
| Date | 12 July 2018 |
| Court | First Tier Tribunal (Tax Chamber) |
[2018] UKFTT 0391(TC)
Judge Marilyn McKeever
Mr Beyzade Beyzade, Counsel appeared for the appellant
Mr Ben Elliott, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
VATA 1994, s. 80 – s. 26A VATA – s. 36 VATA – Reg. 165A – Reg. 38 Value Added Tax Regulations 1995 (SI 1995/2518) – Reg. 166 – Reg. 167 – Reg. 37 – Reg. 31 – Reg. 32 – Reg. 39 – Reg. 38 – Marks & Spencer plc v C & E Commrs (Case C-62/00) [2002] BVC 622 – Banca Antoniana Popolare Veneta SpA (incorporating Banca Nazionale dell'Agricoltura SpA) v Ministero dell'Economia e delle Finanze (Agenzia delle Entrate) (Case C-427/10) [2011] BVC 587 – Recheio Cash & Carry SA v Fazenda Pública (Case C-30/02) [2004] ECR I-06051 – [2014] TC 03822 – R & C Commrs v Investment Trust Companies (in liquidation) [2017] BVC 16 – Leeds City Council v R & C Commrs [2016] BVC 2 – Bratt Auto Services Ltd v R & C Commrs [2016] BVC 505 – Barlin Associates Ltd [2014] TC 04070 – Inventive Tax Strategies Ltd (in administration) [2017] TC 06094 – Freemans plc v C & E Commrs (Case C-86/99) [2001] BVC 365.
This appeal concerned the claim that Value Added Tax (VAT) had been overpaid and a s. 80 claim should be permitted. Failing that a claim for bad debt relief should be permitted. The Appeal was dismissed.
This appeal concerned two alternative claims for relief by First Agency Limited (“FAL”) in respect of:
- VAT it allegedly overpaid in error on invoices submitted to PPP Web Limited (PPP).
- A refusal of a claim for bad debt relief in the sum made in period 05/17 and rejected by a letter dated 22 June 2017.
HMRC had rejected the claims on the basis that they were out of time. Furthermore, HMRC contended they did not satisfy the conditions for the repayment to be made or the bad debt relief to be given.
There are many aspects of the case that did not “stack up”:
- There was a lack of commerciality in the arrangements between FAL and PPP;
- FAL did not deduct the commissions it was entitled to;
- PPP did not pay what it owed;
- No-one noticed the wrong amount of commission was being paid (or not paid) and that the amount of commission charged and VAT paid were four times what they should have been for four years;
- The accountant to both companies was unaware that the commissions were not being paid;
- The accountant adopted many non-standard practices not in accordance with VAT legislation;
- The accountant suggested that HMRC's lack of agreement prevented him from making the necessary adjustments in the accounts or making the claim.
The burden of proof was on the Appellant to show that, on the balance of probabilities, a valid claim complying with regulation 38 was made. It was concluded that:
- It was doubtful there was an error about the amount of the commission;
- An agreement to reduce the commission was not implemented by a repayment of the overpaid commission or a credit of the overpaid commission;
- There was no decrease in consideration for the purposes of reg. 38.
- The Appellant has not proved a decrease;
- FAL made most of the adjustments to its VAT accounts in the wrong periods;
- Regulation 38 requires an adjustment to be made in the period when the reduction in consideration is given effect;
- Adjustments were applied in the periods when the original invoices were issued;
- Most adjustments were invalid.
- PPP did not revise its VAT accounts to reflect the decrease in its input tax and it made no payment of the additional VAT it owed to HMRC.
The conditions required by reg. 38 were not satisfied in any of the periods under appeal.
The claim was out of time in respect of all but one period.
Any invoice issued more than 30 days before 17 September 2011 was already due and payable under the terms of the Service Agreement. Any agreement between PPP and FAL could only have been to defer payment.
The bad debt relief claim was made in May 2017. The claim was out of time being over four years and six months from 9 July 2012 is 8 January 2017. and is therefore out of time.
The Appellant had not proved, on the balance of probabilities, that it was owed a debt by PPP or that any debt was written off.
It was found that there was no reasonable prospect of success in relation to the arguments that the EU Principle of Effectiveness applied to extend the time limits for the s. 80 claim and/or the bad debt relief claim. The application to strike out the new grounds of appeal was accepted.
Many aspects of the case did not stack up and it is not wonder that the appeal was dismissed. The case demonstrates the need to be in time when making claims.
[1] This consolidated appeal concerns two alternative claims for relief by First Agency Limited (“FAL”) in respect of VAT it says was overpaid by it in error on invoices submitted to its associated company, PPP Web Limited (“PPP”). FAL made an overpayment claim under section 80 Value Added Tax Act 1994 (“VATA”) in the sum of £109,853. The original decision to refuse the claim was made on 5 July 2016 and, on review, the decision was upheld by a letter dated 21 October 2016. The Appellant appeals against the decision of 21 October 2016. The second element of this appeal relates to a refusal of a claim for bad debt relief in the sum of £38,655 in VAT made in period 05/17 and rejected by a letter dated 22 June 2017.
[2] In each case, HMRC rejected the claims on the basis that they were out of time and, in any event, did not satisfy the conditions for the repayment to be made or the bad debt relief to be given.
[3] I had before me several bundles of documents relating to the consolidated appeal, the bundles prepared for the earlier appeal on the section 80 VATA claim only (before consolidation) and a number of versions of a letter of 19 February 2016 and its enclosures, which, as we shall see, is a critical document. I also heard oral evidence, on behalf of HMRC, from Mr McDonnell, the officer who worked with the maker of the initial decision and from Mr Greenhough, the review officer. Oral evidence for the Appellant was given by Mr Obez who was the shareholder of PPP and at different times the director of PPP and FAL and Mr Gbotta, who was accountant to both companies. At the request of HMRC, Mr Obez's evidence was heard in the absence of Mr Gbotta and vice versa. Mr Obez is Belgian and his English was limited. He therefore participated in the proceedings via a French interpreter.
[4] HMRC initially proposed to argue that the section 80 claim should be denied on the basis that the Appellant would be unjustly enriched, but it did not proceed with this argument.
[5] The law is not in dispute and it will be convenient to discuss at this point how the VAT regime works in the present context and relevant provisions of the VATA and the Value Added Tax Regulations 1995 (“the Regulations”).
[6] Value Added Tax, as its name indicates, taxes the value added at each stage in the supply chain of a service or goods, with the tax ultimately being borne by the consumer. A supplier of services, such as FAL pays VAT (input tax) on the goods and services it buys and charges its customers, in this case PPP, the fee for the service plus VAT (output tax). The VAT paid by PPP is its input tax. When PPP invoices its customers (the “partners” referred to below), it charges its fees for its services, plus VAT on that value. The VAT charged by PPP is its output tax. A VAT registered trader must account to HMRC for VAT. If its output tax is more than its input tax, it pays money to HMRC. If its input tax is more than its output tax, HMRC pays money to the trader. There is a symmetry to VAT transactions which must be maintained for the system to work.
[7] If a trader claims a credit for input tax paid put does not actually pay the consideration within sixth months, the credit is disallowed, so it will have to pay more VAT (section 26A VATA). In this situation, the supplier will already have paid over to HMRC the output VAT charged, corresponding to the customer's input VAT even though it has not received payment.
[8] The supplier is entitled to claim Bad Debt Relief under section 36 VATA in order to obtain a refund of the VAT it has overpaid. There are conditions, and in particular, the supplier must have written off the debt in its accounts. Section 36, so far as relevant, provides as follows:
(1) Subsection (2) below applies where–
- a person has supplied goods or services … and has accounted for and paid VAT on the supply,
- the whole or any part of the consideration for the supply has been written off in his accounts as a bad debt, and
- a period of 6 months (beginning with the date of the supply) has elapsed.
(2) Subject to the following provisions of this section and to regulations under it the person shall be entitled, on making a claim to the Commissioners, to a refund of the amount of VAT chargeable by reference to the outstanding amount.
[9] The time limits for a claim are dealt with in the regulation 165A which provides:
[165A][(1) Subject to paragraph (3) [and (4)] below, a claim shall be made within the period of [4 years and 6 months] following the later of–
- the date on which the consideration (or part) which has been written off as a bad debt becomes due and payable to or to the order of the person who made the relevant supply; and
- the date of the supply.
(2) A person who is entitled to a refund by virtue of section 36 of the Act, but has not made a claim within the period specified in paragraph (1) shall be regarded for the purposes of this Part as having ceased to be entitled to a refund accordingly.
[10] Regulation 166 provides for the claim to be made in the VAT return
… save as the Commissioners may otherwise allow or direct, the claimant shall make a claim to the Commissioners by including the correct amount of the refund in the box opposite the legend “VAT...
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