Revenue and Customs Commissioners v Southern Cross Employment Agency Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 01 April 2015 |
| Neutral Citation | [2015] UKUT 122 (TCC) |
| Date | 01 April 2015 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Mr Justice Newey
Miss Jessica Simor QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Appellants
Mr Peter Mantle, instructed by Crowe Clark Whitehill LLP, appeared for the Respondent
Value added tax – Whether Value Added Tax Act 1994 (“VATA 1994”), s. 80 prevents HMRC from entering into a binding compromise agreement for the repayment of money paid by way of VAT – Whether any such agreement was ultra vires and so void – Whether such an agreement was concluded on the facts.
The Upper Tribunal (UT) dismissed HMRC's appeal against the decision of the First-tier Tribunal (FTT) in Southern Cross Employment Agency Ltd TAX[2014] TC 03228, confirming that (1) HMRC and Southern Cross Employment Agency Ltd (Southern Cross) did enter into a binding compromise agreement (under which Southern Cross was repaid output VAT previously accounted to HMRC); (2) HMRC were empowered to enter into such an agreement so the agreement was not ultra-vires and void; and (3) HMRC were not entitled under the Value Added Tax Act 1994 (“VATA 1994”), s. 80(4A) to raise an assessment to recover the sums repaid.
Southern Cross had submitted a claim to recover output VAT for which it had accounted in the past, believing it to have been incorrectly charged and paid over to HMRC. HMRC had agreed the supplies in question were exempt from VAT and following correspondence and negotiations had repaid 74% of the amount claimed plus interest. HMRC then raised assessments to recover the amounts repaid when the later decisions of the FTT and UT in Moher (t/a Premier Dental Agency) TAX[2011] TC 01148 and Moher (t/a Premier Dental Agency) v R & C Commrs VAT[2012] BVC 1,613 confirmed that the supplies were in fact taxable.
The FTT upheld Southern Cross' appeal against HMRC's assessments finding on three issues, each of which HMRC appealed to the UT and which the UT approached in reverse order.
1) Issue three: HMRC argued that VATA 1994, s. 80 prevented HMRC from entering into any binding compromise agreement for the repayment of VAT except where s. 85 (which concerns the settlement of pending appeals) was applicable. S. 80 provided a comprehensive regime for the repayment of VAT and recoupment of such payments; HMRC could not make a repayment otherwise than pursuant to s. 80(1)–(2A), and s. 80(4A) empowered HMRC to reclaim any payment that turned out not to have been due. The UT rejected this argument for a number of reasons, including in particular because: (i) IR Commrs v Nuttall TAX[1990] BTC 107 supported that HMRC could enter into binding agreements otherwise than under the Taxes Management Act 1970, s. 54 which corresponded with VATA 1994, s. 85; and (ii) both R v C & E Commrs, ex parte Building Societies Ombudsman Co Ltd VAT[2001] BVC 3 and C & E Commrs v DFS Furniture Co plc VAT[2003] BVC 493 showed that HMRC could be precluded from assessing under s. 80(4A) by judicial determinations and s. 85 agreements even though s. 80 did not expressly cater for either provision and it followed that where no appeal was pending, HMRC's liabilities could be similarly fixed for the purpose of s. 80(1) and (4A) by means of a contractual agreement outside s. 85.
2) Issue two: HMRC argued that even if not barred by s. 80, HMRC had no power to waive tax due or pay money where they had no liability to do so, which meant the agreement was ultra-vires and so void. The UT rejected this argument also. At the time of the agreement there was no clarity as to the VAT position and it could not be known with certainty that the supplies were not exempt and HMRC could not disavow any agreement simply on the basis that the decision-maker(s) did not know what had since been determined. In any event, there was no evidence that the decision-makers did not think that the supplies either might not be, or were not, exempt, in which case there could be no error of law.
3) Issue one: HMRC argued that the FTT ought to have decided that no contract (compromise agreement) had been formed because there was no intention to create legal relations outside the VATA regime and the supposed contract lacked consideration. In this respect, the UT confirmed the FTT's conclusion that the correspondence between Howarth Clark Whitehall (Southern Cross' advisers) and HMRC pointed towards a process of negotiation and, in the end, an intention to conclude a contractual agreement, rather than (as HMRC had asserted) HMRC doing no more than ascertaining the extent of their liability under s. 80. Whether the individuals involved may or may not have seen things that way was unimportant, matters were to be assessed on an objective basis.
Southern Cross made a claim for repayment of output VAT that at the time it believed it had incorrectly charged. HMRC agreed that the supplies were exempt but resisted the claim on the grounds that Southern Cross would be unduly enriched. An agreement was eventually reached under which HMRC repaid 74% of the amount claimed plus interest. However, a later UT decision confirmed that the type of supply in question was in fact taxable, not exempt, which meant Southern Cross had been correct to charge VAT in the first place and ought not to have been entitled to repayment. Accordingly, HMRC raised an assessment to recover the repayment and Southern Cross appealed. The FTT upheld Southern Cross' appeal, ruling that HMRC could not go back on their deal just because it subsequently turned out to be a bad deal for HMRC when it later became known that the view of the law held at the time was incorrect. The UT has now confirmed that decision.
[1] In 2010, HM Revenue and Customs (“HMRC”) made a payment of nearly £1.4 million to the respondent, Southern Cross Employment Agency Limited (“Southern Cross”). In the previous year, Southern Cross had submitted a claim to recover VAT for which it had in the past accounted to HM Customs and Excise (to whom I shall also refer as “HMRC”). According to Southern Cross, the payment to it was made pursuant to a contractual agreement compromising the repayment claim. HMRC, however, maintain that they were barred from entering into any such agreement by section 80 of the Value Added Tax Act 1994 (“the VATA”), that such an agreement would in any case have been ultra vires and void and, finally, that no contractual agreement was concluded on the facts. According to HMRC, Southern Cross was not entitled to the money it was paid and assessments were properly raised to recover it.
[2] In a decision dated 17 January 2014 (“the Decision”), the First-tier Tribunal (“the FTT”) (Judge Berner and Mr Jenkins) ruled in favour of Southern Cross. HMRC, however, appeal against the Decision.
[3] Southern Cross is an employment agency specialising in the supply of dental nurses to dentists.
[4] In 2001, Horwath Clark Whitehill wrote to HMRC on Southern Cross's behalf to say that they considered its supplies of dental nurses to be exempt from VAT. When HMRC replied a few weeks later, they agreed that the supplies were exempt for VAT purposes. In the light of that, Southern Cross sought repayment of VAT for which it had accounted to HMRC between 1998 and 2001. HMRC met the claims.
[5] In 2009, after HMRC had accepted that the three-year limitation period for which there had previously been provision was unlawful, Horwath Clark Whitehill submitted on Southern Cross's behalf a further claim for the repayment of VAT, this time for the period from 1973 to 1997. The total amount sought was £861,162.65.
[6] Mr Barry Knight, an officer of HMRC, responded to Southern Cross's claim in a letter of 2 December 2009, raising the defence of unjust enrichment for which section 80(3) of the VATA provides. He suggested that there was evidence indicating that, “prior to VAT free competition, the VAT would have been passed on and that [Southern Cross] would be unjustly enriched”. Horwath Clark Whitehill, however, replied that they were “strongly of the opinion that [Southern Cross] would not be unjustly enriched by the payment of this claim” and that, in any case, the age of the claim rendered the unjust enrichment defence inapplicable.
[7] Mr Knight took issue with the points made by Horwath Clark Whitehill. In particular, he said in a letter of 8 January 2010:
It seems that there is doubt whether [Southern Cross] would benefit by being wholly or partly unjustly enriched if the repayment of the claim of 30 March 2009 was made in full. In view of this doubt …, perhaps you could demonstrate how your client suffered a loss as result of passing the VAT on for the period of this claim. I would be happy to meet to discuss this further.
[8] On 29 January 2010, Mr Knight and his manager had a meeting with Horwath Clark Whitehill. A fortnight or so later, Mr Knight sent Horwath Clark Whitehill a letter in which he said:
The point here is that the main competitors, for most of the period of the claim, were accounting for VAT in the same manner as your client. Hence, to at least an extent, it cannot be said to have suffered a loss as a result of accounting for VAT on its services when its competitors were exempting their supplies. It appears that Temp Dent Dental Agency Ltd may have been the first competitor to have finally got the VAT treatment correct.
It follows, as VAT was passed on and as competitors were also accounting for VAT, that [Southern Cross] would, at least to an extent, be unjustly enriched by the payment of the claim.
[9] Replying on 9 March 2010, Horwath Clark Whitehill continued to “maintain that [Southern Cross] rather than being unjustly enriched was put in a position whereby its profits were squeezed”. They explained:
on the balance of probabilities and with the additional evidence which has come to light, it seems reasonable to assume that [Southern...
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