Royal Borough of Kensington & Chelsea
| Jurisdiction | UK Non-devolved |
| Judgment Date | 30 July 2014 |
| Neutral Citation | [2014] UKFTT 729 (TC) |
| Date | 30 July 2014 |
| Court | First-tier Tribunal (Tax Chamber) |
[2014] UKFTT 729 (TC)
Judge Rachel Perez, Mr James Midgley
Mr Richard Vallat of counsel appeared for the appellant
Mr Philip Shepherd of HMRC appeared for the respondents
Value added tax - Value Added Tax Act 1994 ("VATA 1994"), Value Added Tax Act 1994 section 80s. 80 - Finance Act 2008 ("FA 2008"), Finance Act 2008 section 121 subsec-or-para 1s. 121(1) (extended time limits for old VAT claims) - Construction of agreement purporting to override the VATA 1994, Value Added Tax Act 1994 section 80s. 80 prima facie right to refund - Shift of evidential burden to HMRC - Wood v Holden (HMIT)[2006] BTC 208 applied - Held - Agreement operated as assignment/waiver of appellant's right to repayment of VAT only to extent that repayment claims by persons other than appellant had actually been made - Burden on HMRC to prove claims actually made - Burden not discharged - Unjust enrichment not considered as not in issue - Appeal allowed.
The First-tier Tribunal (FTT) allowed the appeal by the local authority Royal Borough of Kensington & Chelsea (RBKC) against HMRC's decision to refuse its late claim for a VAT repayment due to relying on HMRC's faulty guidance on the VAT treatment of certain building control fees.
In 1995, HM Customs and Excise announced that, from 1 April 1985 to 31 December 1995, standard-rating should not have been applied to building control fees for non-domestic properties (Customs Business Briefs 23/1995 and 26/1995). The fees should have been treated as consideration for non-business supplies, and therefore "outside the scope" of VAT. This was because there was no competition with the National House-Building Council (NHBC) and the fees did not relate to business activities.
RBKC reclaimed, under Value Added Tax Act 1994 section 80s. 80, the VAT that it had mistakenly charged on non-domestic building control fees. The time limits in s. 80 were retrospectively extended by FA 2008, s. 121 following Fleming (t/a Bodycraft) v R & C CommrsVAT[2008] BVC 221.
Repayment claims could be made to HMRC by (1) the local authority or (2) the person by whom, or on whose behalf, the work on building control was carried out.
The FTT considered the following issues:
(2) whether the "Method 2 agreement" specified for claims by local authorities operated as:
(a) an assignment/waiver by RBKC of all possible VAT repayment claims (which HMRC contended), or
(b) an assignment/waiver in respect of only VAT repayment claims actually made (which RBKC contended);
(3) if RBKC was right, in that the "Method 2 agreement" assigned or waived claims only actually made, then the second issue was whether the burden was on:
(a) RBKC to prove what claims were not made (which HMRC contended) or
(b) HMRC to prove what claims were made (as RBKC contended); and
(4) whether the burden of proof was discharged.
The FTT held that the "Method 2 agreement" waived or assigned RBKC's right to repayment only to the extent that any applications were actually made (para. 43 of the decision).
RBKC had no involvement in any repayments claims made direct to HMRC (or the former HM Customs and Excise), so the necessary evidence was never available to it. The FTT held that it would be unreasonable, and unjust, to expect RBKC to adduce evidence of relevant applications not having been made (quite apart from the difficulty of requiring RBKC to prove a negative) (para. 62 of the decision). Thus, the evidential burden shifted to HMRC (applying Wood v Holden (HMIT)TAX[2006] BTC 208; [2006] EWCA Civ 26).
HMRC knew, as far back as 16 September 1997, that RBKC had chosen Method 2. So, HMRC were on notice from that date that they should keep evidence about the operation of Method 2 in relation to RBKC. However, HMRC destroyed such evidence at least seven years later in about 2004. If the Crown did not want to accede to claims such made by RBKC, it should have been more careful before allowing a situation to arise whereby a claim could be made which depended on HMRC adducing evidence that only HMRC could have and which HMRC no longer held (para. 64 and 65 of the decision). Thus, the FTT held that the evidential burden was on HMRC to prove what applications were made.
The FTT held that HMRC had by the time of the hearing no evidence of any applications having been made. Thus, HMRC failed to discharge the burden of showing what applications were made. Any destruction by HMRC was not done in bad faith (para. 70 of the decision).
This case illustrates some of the problems that arise when the law is changed retrospectively.
[1]It was common ground that the appellant had overpaid £584,572 VAT to HMRC in reliance on HMRC's guidance (in fact, there may have been a few months' more VAT, but the appellant waived that). The question was whether the appellant was entitled to repayment of that £584,572 VAT (a) in light of the Method 2 agreement between the parties and (b) in the absence of evidence as to which, if any, repayment claims had been made by persons other than the appellant as envisaged by the agreement.
[2]We allowed the appeal by summary decision. We decided that-
(2) on a proper construction of the Method 2 agreement, the appellant had by the agreement waived (or assigned) its right to repayment of VAT only to the extent that repayment claims by persons other than the appellant had actually been made;
(3) the burden was on HMRC to show that repayment claims by persons other than the appellant had actually been made;
(4) HMRC did not discharge that burden; and
(5) the appellant is therefore entitled to repayment of £584,572 VAT.
[3]We now give our full decision at the appellant's request.
[4]The summary decision was reached by Judge Perez and Mr Midgley together. Since then, Mr Midgley has retired from the tribunal. This full decision has been drafted by Judge Perez alone.
[5]The parties cited the following-
•Chartbrook Ltd v Persimmon Homes LtdELR[2009] 1 AC 1101
•C & E Commrs v National Westminster Bank plcVAT[2003] BVC 633
•Conde Nast Publications Ltd v R & C CommrsVAT[2008] BVC 221
•Fleming (t/a Bodycraft) v R & C CommrsVAT[2008] BVC 221
•R & C Commrs v NoorVAT[2013] BVC 1571
•Investors Compensation Scheme Ltd v West Bromwich Building SocietyWLR[1998] 1 WLR 896 at p. 912
•Marks & Spencer plc v C & E CommrsECAS (Case C-62/00) [2002] BVC 622
•Oxfam v R & C CommrsVAT[2010] BVC 108
•Reed Employment Ltd v R & C CommrsVAT[2013] BVC 1593
•Wood v Holden (HMIT)TAX[2006] BTC 208
•Halsbury's Laws of England 5th Edition, Volume 11, paragraphs 769 to 775 (incidence of burden of proof)
•Halsbury's Laws of England 5th Edition, Volume 22, paragraphs 357 to 363 (principles of construction).
[6]The appellant ("RBKC") is a local authority. One of its functions is the regulation of building works, for which it charges building control fees.
[7]On 11 November 1985, HM Customs and Exercise (a predecessor to HMRC) issued guidance that building control fees charged by local authorities in England and Wales were subject to VAT from 1 April 1985. This was said to be due to the Building (Approved Inspectors etc.) Regulations 1985 (S.I. 1985/1066) and to the approval of NHBC Building Control Services Ltd to carry out certain building control services.
[8]It was common ground that, in accordance with that guidance (and in common with other local authorities), RBKC charged and accounted at the standard rate for VAT on non-domestic building control fees.
[9]Late in 1995, HM Customs and Excise ("HMCE") changed its guidance to say that, from 1 April 1985 to 31 December 1995, VAT should not have been charged on building control fees for non-domestic properties. The fees should instead, said the revised guidance, have been treated as consideration for non-business supplies and therefore outside the scope of VAT. This was because there was no competition with the NHBC and the fees did not relate to business activities. This changed guidance was in HMCE business-briefs 23/95Business Briefs 23/95 and business-briefs 26/9526/95.
[10]Accordingly, RBKC sought to recover amounts mistakenly paid as VAT on non-domestic building control fees under Value Added Tax Act 1994 section 80section 80 of the Value Added Tax Act 1994. They were able to bring the claim despite the time limits in Value Added Tax Act 1994 section 80section 80 because of the extended time limit given by Finance Act 2008 section 121section 121 of the Finance Act 2008. This is commonly referred to as a "Fleming claim" because Finance Act 2008 section 121section 121 was enacted (with retroactive effect) following the case of Fleming (t/a Bodycraft) v R & C CommrsVAT[2008] BVC 221.
[11]The claim covers the period 6 April 1986 to 31 March 1997. Mr Vallat told us that, before January 1986, RBKC charged no VAT at all on these fees due to a special regime for inner London. This meant, he said, that the repayment claim could date back only to 1 January 1986. Mr Vallat also told us that there would be a possible point about a transfer of functions order in relation to the period 1 January 1986 to 5 April 1986. But he dispensed with that point by waiving the part of RBKC's claim relating to that period, so that the period covered by the claim starts with 6 April 1986.
[12]As a result, the amount of VAT repayment that RBKC claimed on the appeal came to £584,572. HMRC agreed that this would be the amount due to RBKC if the appeal were to succeed.
[13]It was common ground that RBKC were prima facie entitled under the legislation to a VAT repayment of this amount, but that the agreement they had reached had changed that position. The issues between the parties related to the effect of that agreement.
[14]In a guidance note published in 1996 ("the 1996 guidance note"), HMCE advised local authorities of two...
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