Unistar Trading Ltd ((in Liquidation)) and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 16 April 2020 |
| Neutral Citation | [2020] UKFTT 191 (TC) |
| Date | 16 April 2020 |
| Court | First Tier Tribunal (Tax Chamber) |
[2020] UKFTT 191 (TC)
Judge Jeanette Zaman, Jo Neill
Mr Ben Walker-Nolan, counsel, instructed by The Khan Partnership LLP, appeared for the appellants
Mr James Puzey and Mr Nicholas Macklam, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax– Determination of interest by Tribunal under VATA 1994, s. 84(8) – Convention that interest be awarded at base rate plus 1% – Evidence adduced that appellants were paying rates in excess of that level – Rates available to class of borrowers – R & C Commrs v RSPCA; R & C Commrs v ToTel Ltd [2007] BVC 546 and Emblaze Mobility Solutions Ltd v R & C Commrs [2018] BVC 525 considered and applied – Interest awarded based on evidence of rates available to SMEs during the period.
The appellant was entitled to interest from HMRC under the now repealed s. 84(8) of VATA. The FTT concluded that interest due on input tax withheld by HMRC should be calculated based upon the rates available to similar classes of borrowers and it used an academic study to assess the rates available at the material times.
The appellant had had a large amount of input tax withheld by HMRC because HMRC considered that it had been incurred on transactions which the appellant either knew or should have known were connected with fraud. On appeal the FTT determined that the appellant was entitled to recover the input tax and HMRC made the repayment plus interest. The appellant considered that the interest paid by HMRC was inadequate and asked the FTT to increase the award.
S. 84(8) of VATA gives the tribunal discretion to award interest “at such a rate as [it] may determine”. S. 84(8) was repealed with effect from 1 April 2009 and replaced with s. 85A of VATA which specifies the rate of interest which may be awarded. Under transitional provisions the repealed s. 84(8) continues to apply to, inter alia, appeals lodged before 1 April 2009 and Unistar's appeal falls into this category.
The disallowed input tax was claimed on the 04/06 and 05/06 returns, the appeals were heard in February and November 2012 with the decision released in February 2013. The withheld input tax relating back to 2006 was repaid in September 2013 along with a repayment supplement and interest calculated at Base Rate plus 1 %.
In relation to the interest paid by HMRC the FTT had two issues to decide:
- What was the appropriate interest rate?
- From when should interest be calculated
The legislation does not specify how the tribunal should determine the rate of interest. The lead cases on the award of interest under s. 84(8) are R & C Commrs v RSPCA; R & C Commrs v ToTel Ltd [2007] BVC 546 and Emblaze Mobility Solutions Ltd v R & C Commrs [2018] BVC 525, and the FTT referred to these and others.
The FTT concluded (see para. 153) that to compensate Unistar it was required to determine a “fair rate”, “based on rates available for short-term unsecured borrowings”. Although the conventional interest rate is Base Rate plus 1% (this rate being commonly used in commercial proceedings) the FTT can decrease this rate if it is considered too high or increase the rate “because on the facts the taxpayer has had to borrow at a higher rate”.
The FTT heard extensive evidence regarding the ways in which Unistar was financed and the interest rates which it paid. The companies both borrowed significantly from the main shareholder who charged rates above normal bank lending. The average rates paid by the appellants on this borrowing were 28% and 19% and they argued that HMRC should pay interest at this rate. HMRC challenged this argument on the grounds that this finance was more by way of profit share or capital injection. The FTT was also presented with evidence regarding the potential interest rates which would be available from a commercial bank. The appellants argued that due to their circumstances it would not have been eligible to borrow at the lowest available commercial rates.
Both sides presented evidence from expert witnesses. One of HMRC's experts referred to an academic report by the Warwick University Business School concerning interest rates charged on borrowing by small and medium sized enterprises in the years when the input tax was withheld from the appellants. The FTT decided, based upon this academic report, to award interest at Base Rate plus 3.6% increasing to Base Rate plus 3.7% from 1 January 2010.
In considering the second question, the FTT accepted that interest should be calculated from the date Unistar would have been repaid the input tax to the date it was in fact paid. While the latter date is easy to determine, the parties were not agreed on the former. The appellants argued that interest should be calculated with effect from 10 working days after the submission of the return. However, the FTT agreed with HMRC that allowance should be made for HMRC's need to verify returns. It reviewed the historic returns submitted by Unistar and used these to calculate the average length of time for a repayment to be made.
Using this calculation the interest ran from 8 June 2006 to the date the input tax was repaid.
Finally, the FTT confirmed that, in keeping with previous case law on this issue, interest due under s. 84(8) was calculated independently of the repayment supplement, i.e Unistar was entitled to receive interest at the rates determined by the FTT and a repayment supplement.
The wider impact of this case is likely to be limited because it concerned VAT legislation which was repealed some time ago. With effect from 1 April 2009 s. 84(8) of VATA was replaced with s. 85A. While s. 84(8) gives the tribunal discretion to determine the interest rate payable, s. 85A specifies the rate to be used. Unistar was entitled to interest under the (in most cases more generous) s. 84(8) because, under transitional provisions, s. 84(8) continues to apply to many HMRC decisions made before 1 April 2009.
The fact that in 2020 a hearing was held concerning interest due on VAT claimed in 2006 and actually repaid in 2013 demonstrates how protracted disputes with HMRC and the associated legal proceedings can be.
[1] Unistar Trading Limited (“UTL”) and Unistar Group Limited (“UGL”) (together, “Unistar”) applied to the Tribunal for interest under s84(8) Value Added Taxes Act 1994 (“VATA 1994”) on 9 January 2015 and 31 January 2017 respectively (together, the “Applications”).
[2] HMRC had denied Unistar's entitlement to deduct input tax as follows:
- on 7 December 2007 HMRC denied input tax claimed by UGL of £391,628.65 and £937,723.15 for the VAT accounting periods 04/06 and 05/06 respectively;
- on 7 December 2007 HMRC denied input tax claimed by UTL of £604,939.14 and £328,514.91 for the periods 04/06 and 05/06 respectively; and
- on 24 January 2008 HMRC denied input tax claimed by UGL of £126,781.20 for the period 05/06.
[3] The ground for these decisions was that the input tax was incurred by Unistar in a transaction or transactions connected with the fraudulent evasion of VAT and that they knew or should have known of this fact.
[4] Unistar appealed against these decisions, and those appeals were heard by the Tribunal in February and November 2012. The Tribunal's decision was released on 19 February 2013 (this being the decision of Judge Porter in Unistar Group Ltd [2013] TC 02747 (“Unistar 2013”)) and allowed the appeals. Since then:
- UGL and UTL received the withheld VAT from HMRC on 25 September 2013;
- HMRC paid repayment supplements of £72,806.65 to UGL and £46,673 to UTL; and
- pursuant to an agreed direction from the Tribunal, HMRC paid interest at 1% above the Bank of England's base rate (Base Rate) on the sums found to be due to UGL and UTL on 26 July 2017. The rate of Base Rate plus 1% is referred to as the conventional rate (and all references in this Decision to rates of interest are expressed on a per annum basis unless otherwise stated).
[5] The payment of interest at [4(3)] above should have amounted to £212,049.76 for UTL and £338,090.12 for UGL. Both parties acknowledged that, as a result of a miscalculation by HMRC, the amount actually paid by HMRC by way of interest was an overpayment, amounting to Base Rate plus 2%. HMRC had paid £280,763.41 to UTL and £434,533.48 to UGL. HMRC has not requested repayment of the overpaid amounts (for reasons which are not apparent to us), but does not concede that these additional amounts should be retained by either UTL or UGL, such that when HMRC submits that the appropriate rate of interest has already been paid it refers to the 1% above Base Rate specified in the agreed direction from the Tribunal.
[6] The Applications made somewhat slow progress towards the hearing before us, in part due to them being stayed until the final determination of Littlewoods Ltd v R & C Commrs [2017] BVC 54. There have been various directions issued by the Tribunal during this period, some following joint applications by the parties, others in response to applications by one of the parties.
[7] On 9 October 2019 the Tribunal issued directions upon a joint application by the parties (the “October 2019 Directions”) relating to the admission of further evidence by UTL and UGL, being two expert reports, two supplemental expert reports and three witness statements which were served on HMRC on 1, 2 and 3 October 2019 (the “Further Evidence”). It was directed that Unistar may rely upon the Further Evidence but that they “may only rely on any additional evidence in these proceedings with the permission of the Tribunal”.
[8] On the second day of the hearing we were provided with a supplemental statement dated 21 January 2020 from Ms Wild (the accountancy expert for HMRC which had been provided to Unistar the previous day) and a response by way of supplemental statement dated 22 January 2020 from Mr Drewe...
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