HBOS and Lloyds Banking Group have won an appeal at the Upper Tribunal over a demand for VAT interest repayments following a legislative error
In the Upper Tribunal, HBOS and Lloyds Banking Group appealed against a First Tier Tribunal (FTT) decision relating to bad debt relief for periods between 1989 and 1997.
The Upper Tribunal ruled that the banking group was entitled to be paid interest from HMRC relating to the time they made repayment claims, when UK legislation was not compliant with EU law.
The key issues raised in the appeal related to the bad debt relief legislation that had previously been held to be incompatible with EU law and the period over which interest arose.
The interest at issue in the appeal relates to claims that the appellants, HBOS and Lloyds, made for VAT bad debt relief.
Between 1989 and 1997 the appellants provided cars under hire purchase agreements with retention of ownership when a customer defaulted on the hire charge.
As a result, they were unable to claim bad debt relief under the condition that for it to be claimed on a supply of goods, the title in the goods had to have been passed.
At the tribunal, HBOS and Lloyds claimed that interest of around £10m, instead of the original £872,147.04 paid, was due.
The basis for that relief is that suppliers account for VAT on the sale price charged to the customer. When customers do not pay up, the supplier will have accounted for more VAT than they should have done.
In this case, the appellants’ claims were made in 2007 (HBOS) and 2009 (Lloyds) for the periods 1 April 1989 to 19 March 1997.
HMRC initially refused the claims on the basis that certain conditions were not met. However, in 2016 the title condition was held to be unlawful under EU law by the Court of Appeal.
In February 2019, HMRC eventually paid the appellants the bad debt relief that they had claimed, for £12,298,561. It also paid added interest from the dates of their claims until 2019.
The appellants argued, however, that they were also entitled to s78 [include name of Act Value Added Tax Act (VATA 1994),] interest from the dates on which all of the conditions for refunds, apart from the invalid property condition, had been satisfied.
HMRC was successful in the FTT on the basis that the interest ran from the dates of the appellant’s claims.
In the Upper Tribunal, the dispute was whether the interest should run from the date of the claims or whether it should run from the date the valid conditions for debt relief were met.
Under s78 VATA 1994, HMRC would be liable to pay interest where ‘due to an error on the part of the commissioners’ a person has ‘suffered delay’ in receiving payment due to them in connection with VAT’.
In their appeal, the appellants argued that the FTT was mistaken by ruling that the enactment of the property transfer condition was an error in the legislation, not HMRC, and that it was therefore not ‘an error on the part of the commissioners’ under s78.
HMRC argued that interest should only run from the time when the dispute was resolved in 2002 or 2004.
The Upper Tribunal ruled that the behaviour of HMRC could be regarded as an error. As for the period over which interest arose, it concluded that the appellants would have made their claims when the valid bad debt conditions were met.
In support of this, the tribunal said that bad debt relief claims were made by the appellants concerning supplies which did not involve the retention of title clauses.
Judge Swami Raghavan said: ‘We have concluded that there was an error of law in the FTT decision and we reject HMRC’s case that s78 in any event prevents interest from arising from the earlier dates.
‘We consider that the error identified was material and that the FTT decision should be set aside and remade so as to correct it. We accordingly remake the decision to hold that the error arising from the enactment of the unlawful property condition was an error falling within s78.’
The appellants’ appeal was allowed.
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