TC03554: Leigh Day (formerly Leigh Day & Co) (A Firm)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 09 May 2014 |
| Neutral Citation | [2014] UKFTT 425 (TC) |
| Date | 09 May 2014 |
| Court | First Tier Tribunal (Tax Chamber) |
[2014] UKFTT 425 (TC)
Judge Nicholas Aleksander, Mrs Caroline de Albuquerque
Phillippa Whipple QC instructed by the Appellant
Michael Jones, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Value added tax - VAT incorrectly charged - Adjustment to amount of consideration - Whether reg. 38 applies to allow refund of incorrect VAT - No - Whether letter from HMRC to adviser is a valid notice of assessment - No - Discretion of tribunal to award costs where notice of appeal was to VAT and Duties Tribunal - VAT Regulations 1995, reg. 38 - Value Added Tax Act 1994 ("VATA 1994"), Value Added Tax Act 1994 section 73s. 73 - Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009, Sch. 3.
The First-tier Tribunal (FTT) considered whether HMRC were correct in amending the taxpayer's VAT return, which included an adjustment to recover VAT previously paid. Notwithstanding the fact that the services giving rise to the original payment were not taxable being supplies falling outside the scope of VAT, HMRC successfully argued that the error in incorrectly accounting for VAT was not capable of correction under reg. 38 of the Value Added Tax Regulations 1995 and was otherwise out of time for correction. However, the FTT also found that the assessment letter issued by HMRC to direct the taxpayer to reverse the input tax reclaim on the return was invalid, having not been notified to the taxpayer.
The taxpayer, Leigh Day, was a firm of solicitors specialising in personal injury claims. It appealed against a decision of HMRC to amend its VAT return for period 07/07 by £418,313.12, resulting in additional VAT of £193,829.64 becoming payable. The dispute related to VAT on payments made by and to the Legal Services Commission (LSC) under the legal aid scheme. Leigh Day sought repayment of VAT plus interest amounting to £224,483.48, under reg. 38 of the VAT Regulations 1995, but its claim was refused.
The FTT heard that the taxpayer had been instructed to act for individuals against a company known as Cape plc. Their grievances concerned exposure to asbestos leading to lung disease and other problems. In 1997, proceedings were commenced in the High Court on behalf of five individuals but, over the years, this figure increased and by December 2001 there were 7,377 individuals involved in the class action, two-thirds of whom were represented by Leigh Day. In the course of the litigation, the LSC made substantial interim payments to Leigh Day which included an amount on account of VAT, and Leigh Day paid £418,313.12 to HMRC. In fact, VAT was not chargeable on these amounts because the claimants were residents of South Africa and the services supplied by Leigh Day fell outside the scope of VAT. Although agreement was reached in 2003 with the LSC, Cape plc and the other parties as to settlement of costs, it took until November 2006 for Leigh Day to reach agreement as to the amount the LSC would contribute. A final payment of £1,875,000 from the LSC was paid into Leigh Day's client bank account in November 2006. The LSC interim payments were repaid to the LSC by Leigh Day between 2007 and 2012.
On 30 April 2007 Leigh Day wrote to HMRC seeking guidance as to how to deal with the VAT adjustments arising from the settlement of the litigation and suggesting it should issue a credit note for the interim payments previously invoiced to the LSC and issue a new invoice issued for the amount actually received from the LSC. HMRC advised that a credit note should be issued to the LSC and the input tax should be adjusted on the next return. An adjustment for VAT of £418,313.12 was duly made and was entered in the return for period 07/07 with the consequence that the return showed a net repayment due to Leigh Day of £224,483.48. HMRC refused to make the repayment and stated that the claim was out of time under reg. 34, and that reg. 38 was not applicable. By letter dated 19 October 2007 HMRC directed that the figures on the return be adjusted to reverse the input tax reclaimed. HMRC asserted that the letter was an assessment for VAT purposes.
HMRC confirmed by letter dated 31 January 2008 that the VAT in issue was not refundable and Leigh Day then appealed to the FTT. It was Leigh Day's contention that HMRC had taken no steps to pursue the alleged VAT due in the sum of £193,829.64 and were out of time to assess. Leigh Day acknowledged that it had already received the benefit of this amount and, by the appeal, sought to recover the balance of VAT overpaid in the sum of £224,483.48. HMRC contended that their letter of 19 October 2007 constituted a notice of an assessment and that they were entitled to pursue recovery of the £193,829.64.
The first issue for the FTT was that Leigh Day had accounted for VAT on the interim payments from the LSC, which were, in fact, for services falling outside the scope of VAT and not subject to VAT at all. An amount of £418,313.12 had been paid to HMRC as "VAT", which was not, therefore, due. Leigh Day submitted that the value of the supply of its legal services had been reduced, which meant that, regardless of the liability error, the consideration for the supplies had subsequently changed, so that the wrong amount of VAT had been accounted for. Leigh Day acknowledged that if the only issue in this appeal had been the liability error, then by July 2007 they would have been out of time to correct that error. However, it asserted that as there had been a change in the consideration for its supply of legal services, the required adjustment to the VAT payable could take account not only of the change in the consideration, but also the fact that VAT had previously been wrongly charged. Leigh Day contended that the adjustment issue was governed by reg. 38, and was not subject to the time limit imposed by VATA 1994, section 80 subsec-or-para 4s. 80(4). The other issue was whether HMRC's letter of 19 October 2007 was a valid notification of an assessment for recovery of £193,829.64, this being the balance of the VAT claimed by HMRC to be due in period 07/07.
The FTT considered itself bound by the judgment of the Court of Session in C & E Commrs v McMaster Stores (Scotland) LtdVAT[1995] BVC 406 in that reg. 38 could only be utilised to address adjustments to VAT payable in consequence of a change in the consideration. It could not be used to address circumstances in which VAT had been incorrectly charged in the first place. Even if wrong on this point, the FTT found that Leigh Day had failed to prove it had met all the requirements of reg. 38. Its claim for relief under that regulation, therefore, failed. The consequence of the finding was that Leigh Day would have to rely on reg. 35 in order to correct its error, and make a claim under section 80s. 80, which it was out of time to do. With regard to the assessment, the FTT found that HMRC's letter of 19 October 2007 met all the requirements for a notice of assessment. However, it was addressed to the taxpayer's accountant and was not notified to the taxpayer, as required by VATA 1994, section 73 subsec-or-para 1s. 73(1). It could not, therefore, be valid
The FTT concluded that Leigh Day's error in incorrectly accounting for VAT on its supplies was not capable of correction under reg. 38. At the same time, HMRC were not entitled to rely on their letter dated 19 October 2007 as being a valid notice of assessment, since it was addressed to the taxpayer's accountant. The result was that Leigh Day could not reclaim the VAT paid in error, but that HMRC could not enforce payment of the VAT otherwise due in the disputed period. The decision serves to clarify the application of reg. 38 and confirms that, to be valid, assessments must be notified to the taxpayer.
[1]This is an appeal against the decision of HMRC contained in a letter dated 31 January 2008 upholding on review a decision to amend the Appellant's ("Leigh Day") VAT return for the period 07/07 by £418,313.12, resulting in additional VAT of £193,829.64 being payable.
[2]Phillippa Whipple QC represented Leigh Day and Michael Jones represented HMRC. Witness statements of Richard Meeran, a partner in Leigh Day, and Adrian Cole, Finance Manager of Leigh Day was produced in evidence, and Mr Cole gave oral evidence. In addition a bundle of documents was before us.
[3]With the consent of HMRC, we allowed an application by Leigh Day to amend their Notice of Appeal to include within the scope of this Appeal the issue of whether HMRC's letter of 19 October 2007 was a notification of an assessment for the purposes of section 73 subsec-or-para 1section 73(1), VAT Act 1994;
[4]However, we refused an application by HMRC to amend their Statement of Case to include a new paragraph relating to the regulation 38, VAT Regulations 1995 and the requirement the Leigh Day must have carried out the adjustment in their business accounts within three years of the reduction in the consideration (we allowed other amendments with the consent of Leigh Day, and HMRC withdrew an amendment relating to unjust enrichment). However we noted that in relation to regulation 38, the onus of proof is on Leigh Day to demonstrate that all the requirements of that regulation were met.
[5]At the conclusion of the hearing we gave directions to allow Leigh Day to submit evidence to demonstrate that they had complied with all of the requirements of regulation 38, and for additional submissions to be made in writing by the parties.
[6]The Community Legal Service (Costs) Regulations 2000 applied to the work done by Leigh Day under certificates of public funding. Regulations 18, 20 and 22 are in point
18.-Money recovered to be paid to solicitor
(1)Subject to the following paragraphs of this regulation, and to...
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...520 at [76]) [34] I also referred the parties to the decision of the First-tier Tribunal in Leigh Day (formerly Leigh Day & Co) (a firm) [2014] TC 03554 (although not cited to me), where a similar issue arose as to time limits applicable to regulation 38 claims. [35] I therefore find that t......