Interest for official error: incorrect implementation of EU VAT law

The Upper Tribunal has reversed the decision of the FTT and held that an error in failing to correctly transpose the terms of the VAT Directives in relation to VAT bad debt relief claims was an “error on the part of the Commissioners” for the purposes of VATA 1994 s.78. As such, the taxpayers were entitled to the payment of official interest under s.78 from the time when they would otherwise have made claims rather than when the claims were made and wrongly rejected by HMRC: HBOS plc and Lloyds Banking Group v HMRC [2023] UKUT 13.

Background

The case concerns the UK’s regime for VAT bad debt relief. That scheme was held to be invalid by the ECJ in GMAC UK v HMRC [2016] EWCA 1015 in that it included a condition that on a supply of goods, property in the goods must have passed. The presence of that condition originally prevented HBOS and Lloyds from making bad debt relief claims in relation to their car hire purchase businesses, where cars were repossessed due to the default of the customer, since under those HP arrangements property in the goods was retained until the final instalment was paid. However, in 2007 they made claims for bad debt relief for the periods from 1989 to 1997 and HMRC eventually accepted that those claims were valid following the GMAC decision and made repayments in 2019. HMRC also paid interest on those claims from the date the claims were made in 2007 until 2019 since it was not disputed that the appellants had suffered a delay in receiving refunds due to HMRC’s wrongful rejection of the claims in 2007.

HBOS and Lloyds however claimed that they were entitled to statutory interest payments under VATA 1994 s.78 not simply from the date of their claims in 2007, but from the date that all the conditions for a refund under the bad debt relief rules were met, apart from the property condition, were met. HMRC rejected that claim. Section 78(1)(d) applied where “due to an error on the part of the Commissioners” a person “suffered delay in receiving a payment of an amount due to him” and the non-compliant implementation of the VAT bad debt rules in UK legislation was not an error on their part. The FTT agreed with HMRC on this point and the matter was appealed to the Upper Tribunal.

Decision of the Upper Tribunal

The Upper Tribunal has overturned the decision of the FTT and held that a correct interpretation of s.78 is that it did apply where the UK legislation incorrectly implemented EU law.

In the first place, the Tribunal noted that in Littlewoods v HMRC [2017] UKSC 70 it had been held that section 78 provided an exclusive scheme for the payment of interest on VAT reclaims. However, that case also held that there is a general entitlement to interest on tax levied in breach of EU law. Therefore, there would be a “startling lacuna” if section 78 did not cover errors where UK legislation has been held not to comply with EU law.

Secondly, the Tribunal considered that such an interpretation could give rise to “absurd and incongruous outcomes”. HMRC often provide guidance on how legislation operates and the result of the FTT decision would be that a taxpayer’s right to claim interest under section 78 would, in principle, depend on whether they had relied on that guidance (an error on the part of the Commissioners) or on the text of the legislation directly.

Instead, the Tribunal noted that “Parliament must have recognised when using those words that in so far as a statute concerns matters such as VAT which are within the collection and management powers of HMRC, HMRC is the relevant responsible State body. HMRC’s behaviour, whether in acting or omitting to act, will therefore inevitably reflect the requirements and stipulations of the relevant UK legislative provisions. Behaviour on the part of HMRC (whether that is regarded as an act e.g. taking a payment, or an omission e.g. failing to repay it) whose source is a provision of a non-compliant statutory provision will clearly be something capable of fitting with the words “error on the part of the Commissioners”. That being the case, the Tribunal held that, whether one articulates the error in terms of the statutory error or the corresponding action or inaction on the part of HMRC should not, and does not, make a difference.

HMRC also argued that, until the taxpayers had actually made a claim, there was no amount due to them for the purposes of s.78(1)(d). That was also rejected by the Tribunal. It was clear from the fact that HMRC repaid those claims that it accepted the amounts were “due”, those refunds were delayed and it was clear from the evidence that, in the absence of the invalid property condition, the taxpayers would have made those claims at the earlier times.

As a result, the Upper Tribunal has held that the taxpayers were entitled to statutory interest in relation to the late repayments of VAT stretching back to the time when they would have been expected to make those claims. In practical terms, the financial difference was considerable, resulting in an interest payment of over £10m rather than £800,000.

Comment

The decision appears to be robust, considering the UK’s (pre-Brexit) obligation to provide a method for taxpayers to obtain interest on VAT levied in breach of EU law. As such, taxpayers with any similar claims based on the UK’s failure to correctly transpose the VAT Directives into UK law, should consider whether interest claims can be made from the date they would have made repayment claims in the absence of the incorrect implementation.