The Rank Group PLC v The Commissioners for HMRC

Rank would not have been liable to account for output VAT on supplies that it made; and

Rank would not have been entitled to credit for input tax that was connected with supplies of bingo.

Table 1: Agreed figures as to amounts claimed and repaid

As Table 1 shows, HMRC accepted Claims (i) to (iii) as in-time valid claims and paid Rank the net sum in respect of those claims of £98.01m (representing £166.88m of over-declared output tax reduced by £68.87m of input tax overclaimed). The over-declared output tax and the associated input tax in relation to Claim (iv) were – as can be seen – entirely left out of account for the purposes of calculating Claims (i) to (iii).

It was common ground that, at the time HMRC made payments to Rank in respect of Claims (i) to (iii), HMRC were out of time to make assessments to recover input tax incurred in connection with supplies of bingo for which Rank was wrongly given credit. That, on Rank’s case, (Footnote: ⁴) required HMRC to have recourse to section 81(3A) VATA, a significant provision to which we will return.

Since HMRC rejected Claim (iv) as being out of time, in respect of its VAT periods 12/96 – 12/02, Rank paid an aggregate amount of £67.05m to HMRC that it would not have been liable to pay if it had treated its supplies of bingo as exempt for VAT purposes. (Footnote: ⁵)

In the various letters making Claims (i) to (iii), Rank provided information on both the gross amount of output tax that it had paid on supplies of bingo and the gross amount of input tax for which it had obtained credit attributable to supplies of bingo. Rank made it clear in all of these letters that it expected HMRC to account to it only for the net sum (i.e. output tax as reduced by input tax).

By a letter dated 26 June 2013, and as further particularised in a letter dated 30 June 2014, Rank submitted the present claim to HMRC under section 80(1B) VATA. Rank asserted that:

By a letter dated 10 July 2013, HMRC rejected Rank’s section 80(1B) VATA claim. Rank requested an independent review of HMRC’s decision, and in a letter dated 11 September 2013, HMRC upheld their original decision. On 7 October 2013, Rank made an in-time appeal against this decision to the FTT. By its Decision, the FTT dismissed the appeal.

THE STRUCTURE OF THIS JUDGMENT

Although this is Rank’s claim for repayment of overpaid VAT under section 80(1B) VATA, the overpayment said to have been made and claimed under that section arises out of HMRC’s treatment of Rank’s claims under section 80(1) VATA. Rank contends – and HMRC disputes – that the payments made by HMRC in respect of Claims (i), (ii) and (iii) were too low by an aggregate of £67.05m. In Table 2, these underpayments are described in Rows (e), (l) and (s) of that Table. The question of whether HMRC erred in failing to give credit for Rank’s overpaid tax in this way is considered in Section D below.

The next question – assuming that Rank is correct, and there has been an underpayment in respect of Claims (i), (ii) and (iii) – is how, exactly, for the purposes of section 80(1B) VATA a payment of an amount by way of VAT in the aggregate amount of £67.05m (the sum claimed by Rank under section 80(1B) VATA) is said to have been made by Rank to HMRC. This question is considered in Section E below.

Finally, Section F considers the objection made by HMRC that this claim represented an illegitimate re-opening or appealing of Claims (i), (ii) and (iii) and an attempt to circumvent the time limits that had prevented Claim (iv) from succeeding.

THE CALCULATION OF CLAIMS MADE UNDER SECTION 80(1) VATA

Definition of terms

It is necessary to be clear about a number of terms.

Input tax

Section 24(1) VATA defines “input tax”, in relation to a taxable person, as the following tax:

Output tax

Section 24(2) VATA defines “output” tax (subject to later provisions in VATA), in relation to a taxable person, as VAT on supplies which he makes or on the acquisition by him from another member state of goods (including VAT which is also to be counted as input tax by virtue of the provision described in paragraph 24(2) above).

Payment by reference to accounting periods

Section 25 VATA provides for the accounting for and payment of VAT by reference to periods determined by or under regulations, which periods are known as “prescribed accounting periods”. (Footnote: ⁶)

Generally speaking, a taxable person is entitled, at the end of each prescribed accounting period, to credit for so much of his input tax as is allowable and then to deduct that amount from any output tax that is due from him. (Footnote: ⁷) There is, thus, a set-off, at the conclusion of each accounting period, of input tax and output tax.

If the amount of any input tax for a period exceeds the amount of any output tax (or if there is no output tax), then the amount of the excess is paid by HMRC to the taxable person as a “VAT credit”. (Footnote: ⁸)

Assessments for VAT

Section 73 VATA makes provision for “assessments” of VAT. Section 73(1) VATA provides:

“Where a person has failed to make any returns required under this Act (or under any provision repealed by this Act) or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him.”

There are, however, strict time limits for the making of assessments. The precise detail – set out in sections 73(6) and 77 VATA – does not matter, but it is important to note that HMRC is time limited as to when it can make an assessment.

The operation of section 80(1) VATA: Rank’s contentions

Stage 1: The section 80(1) VATA “credit”

According to Rank, section 80(1) VATA obliges HMRC to credit a taxable person with whatever amount of output tax that person has brought into account that was not output tax due. It was Rank’s contention that the effect of section 80(1) VATA was to look only at the amount of output tax wrongly accounted for in a given prescribed accounting period and to create a credit, in that amount, to the benefit of the taxable person. Any input tax that the taxable person might have set off against this output tax was – at this stage – left out of account.

Thus, to take a concrete example in the form of Claim (iii) (the first claim paid by HMRC) the amount of the credit was the over-declared output tax of £24.57m: see Table 1, under Claim (iii), Column (4).

Stage 2: The “gateway” for a set-off

Rank contended that section 80(2A) VATA made provision for cross-claims or set-off applying in reduction to the credit established in section 80(1) VATA.

Section 80(2A) provides as follows:

“Where –

(a)

as a result of a claim under this section by virtue of section (1) or (1A) above an amount falls to be credited to a person, and

(b)

after setting any sums against it under or by virtue of this Act, some or all of that amount remains to his credit,

the Commissioners shall be liable to pay (or repay) to him so much of that amount as so remains.”

According to Rank, section 80(2A) VATA did not of itself make any provision for cross-claims or set-off. All it did was make clear that the credit under section 80(1) VATA (in this case: this is not a section 80(1A) VATA case) would fall to be reduced “after setting any sums against it under or by virtue of this Act” and that HMRC would be obliged to pay only the net amount after set-off. The set-off provisions were, however, to be found elsewhere in VATA.

Thus, according to Rank, section 80(2A) VATA converts a “credit” in favour of the taxable person into a “liability” of HMRC to pay, but that liability only arises after set-off of cross-claims as envisaged elsewhere in VATA.

Stage 3: The set-off provisions: set-off of liabilities under section 81(3) VATA

According to Rank, the set-off provisions in VATA were contained in sections 81(3) VATA and 81(3A) VATA. Moreover, section 81(3A) VATA was supplemental to, or parasitic upon, section 81(3) VATA, and so it was necessary to begin with this provision.

Section 81(3) materially provides as follows:

“…in any case where –

(a)

an amount is due from the Commissioners to any person under any provision of this Act, and

(b)

that person is liable to pay a sum by way of VAT, penalty, interest or surcharge,

the amount referred to in paragraph (a) above shall be set against the sum referred to in paragraph (b) above and, accordingly, to the extent of the set-off, the obligations of the Commissioners, and the person concerned, shall be discharged.”

Thus, where a liability of the taxable person to HMRC exists, this is set-off against the credit under (in this case) section 80(1) VATA and the credit is, correspondingly, reduced or extinguished. Of course, as with all cases of liability, if it exceeds the credit, the taxable person will continue to be liable for the net amount, after deduction of the credit.

The problem in this case – and this was common ground between Rank and HMRC – was that there was actually no liability of Rank to HMRC. This was because, although Claim (iii) had been made in time for Rank to claim a credit for its over-declared output tax in the amount of £24.57m pursuant to section 80(1) VATA, HMRC was out of time to make an assessment in relation to the input tax that Rank had set-off against this output tax. In relation to Claim (iii), this was the amount of £8.48m identified under Claim (iii) in Table 1, Column 5.

Accordingly, there was no applicable set-off under section 81(3) VATA, and (in the example we are using) Rank’s credit under section 80(1) VATA would remain £24.57m.

Stage 4: The set-off provisions: set-off of non-liabilities under section 81(3A) VATA

Section 81(3A) VATA provides as follows:

“Where—

(a)

the Commissioners are liable to pay or repay any amount to any person under this Act,

(b)

that amount falls to be paid or repaid in consequence of a mistake previously made about whether or to what extent amounts were payable under this Act to or by that person, and

(c)

by reason of that mistake a liability of that person to pay a sum by way of VAT, penalty, interest or surcharge was not assessed, was not enforced or was not satisfied,

any limitation on the time within which the Commissioners are entitled to take steps for recovering that sum shall be disregarded in determining whether that sum is required by subsection (3) above to be set against the amount mentioned in paragraph (a) above.”

Section 81(3A) VATA requires three preconditions to be met:

Provided these three pre-conditions are met, any limitation on the time within which HMRC are entitled to take steps for recovering that sum shall be disregarded for the purposes of calculating what amounts HMRC could set off under section 81(3) VATA.

Relying upon the decision of the Court of Appeal in Birmingham Hippodrome Theatre Trust Ltd v Revenue and Customs Commissioners (Footnote: ⁹) (“Birmingham Hippodrome”) Rank contended that:

The operation of section 80(1) VATA: HMRC’s contentions

We consider HMRC’s contentions using the same four stages of analysis used to describe Rank’s contentions.

Stage 1: The section 80(1) VATA “credit”

Stage 2: The “gateway” for a set-off

It is necessary to consider these two stages together to understand HMRC’s contentions. It was HMRC’s contention that sections 80(1) and 80(2A) VATA made provision for the set-off of output and input tax where these were accounted for within the same prescribed accounting period. There was, accordingly, no need for HMRC to rely on sections 81(3) or 81(3A) VATA, which were only concerned with set-off of output and input tax accounted for in different prescribed accounting periods.

Thus, HMRC contended that – using Claim (iii) as an example again – the £24.57m over-declared input tax (Table 1, Claim (iii), Column (4)) could, simply by virtue of the operation of sections 80(1) and 80(2A) VATA, be reduced by the amount of the associated input-tax (Table 1, Claim (iii), Column (5)).

This was said by HMRC to be a necessary construction of these provisions, because a taxable person could not take the smooth without the rough. In other words, a taxable person should not be able to reclaim over-declared output tax, without giving credit for the associated input tax, otherwise this would result in an unjust enrichment of the taxable person). (Footnote: ¹¹) HMRC contended that the payment of output tax and the deduction of input tax within the same prescribed accounting period were an “inseparable whole” for the purposes of sections 80(1) and 80(2A) VATA. (Footnote: ¹²)

If HMRC is right on this point, there is no need to consider further Stages 3 and 4. However, since HMRC did not accept Rank’s contentions as regards these stages, we proceed to consider HMRC’s contentions on the assumption that we reject HMRC’s contentions in relation to Stages 1 and 2.

Stage 3: The set-off provisions: set-off of liabilities under section 81(3) VATA

On the basis that we rejected HMRC’s contentions in relation to Stages 1 and 2, HMRC accepted that – in order to set-off against the credit due to Rank – it would be necessary to rely upon section 81(3) VATA. So far as this section was concerned, HMRC’s approach was the same as Rank’s. HMRC accepted that it would be necessary to rely not only upon section 81(3) VATA, but also section 81(3A) VATA.

Stage 4: The set-off provisions: set-off of non-liabilities under section 81(3A) VATA

HMRC did not consider that Birmingham Hippodrome provided any assistance in terms of how the set-off provisions in sections 81(3) and 81(3A) VATA operated.

HMRC substantially accepted Rank’s contentions regarding the operation of these provisions, save that HMRC contended that:

The operation of section 80(1) VATA: analysis

Stage 1: The section 80(1) VATA “credit”

Stage 2: The “gateway” for a set-off

We have no hesitation in rejecting HMRC’s contentions on these points as unarguable. We accept the submissions of Rank so far as both Stages 1 and 2 are concerned. Our reasons for this are as follows:

Stage 3: The set-off provisions: set-off of liabilities under section 81(3) VATA

The contentions of the parties in relation to section 81(3) VATA were the same, and we agree with them.

Stage 4: The set-off provisions: set-off of liabilities under section 81(3A) VATA

As has been described, the parties differed as to how the set-off should work. It is necessary to consider two matters:

We consider these questions in turn below.

In Birmingham Hippodrome, as here, the taxable person (the operator of the Birmingham Hippodrome) had accounted for output tax, which it was not liable to pay. It had set-off against that output tax input tax that it had paid. As here, HMRC was out of time for making its own free-standing claim to recover input tax it had wrongly paid to the taxable person.

The Court of Appeal tabulated the output and input tax over various periods as follows: (Footnote: ¹⁵)

Table 5: Table of payments by Birmingham Hippodrome in the Birmingham Hippodrome case

It can immediately be seen that – whether Rank’s approach is adopted or whether HMRC’s approach is adopted – the large repayment of input tax at Item 3 would reduce Birmingham Hippodrome’s claim to nil. Birmingham Hippodrome sought to contend that:

The Court of Appeal rejected Birmingham Hippodrome’s contention and accepted that of HMRC. Before us, however, neither party sought to gainsay the Court of Appeal’s holding that the whole period covered by the relevant mistake needed to be considered. However, because (whether one adopts Rank’s approach or HMRC’s in this case) Birmingham Hippodrome’s case would fail – because of the unusually large payment of input tax in Item 3 – the distinction we are here concerned with did not arise. To this extent, therefore, the Birmingham Hippodrome case does not assist: it considers questions anterior to the questions here arising, which both parties took on board.

The question for us, therefore, is not whether the ratio of the Birmingham Hippodrome case resolves the matter before us – it clearly does not – but whether the approach of the Court of Appeal more generally assists in our determination of whether Rank’s or HMRC’s approach is to be preferred. As to this:

Although by no means deciding the issue before us, we consider that the Court of Appeal’s decision contains several very clear pointers in favour of Rank’s approach and contrary to the approach contended for by HMRC:

We conclude that unless there is something in the wording of sections 80 and 81 that compels the contrary conclusion, Rank’s approach is clearly to be preferred. So far as the question of construction is concerned:

Accordingly, we conclude that HMRC miscalculated the amount that it was liable to pay to Rank in relation to Claims (i), (ii) and (iii) by leaving out of account the £67.05m difference between output tax accounted for and input tax deducted in relation to “Claim (iv)”. We conclude that HMRC has made an under-payment in relation to Claims (i), (ii) and (iii) of a total of £67.05m.

WHAT WAS THE PAYMENT FOR THE PURPOSES OF SECTION 80(1B) VATA?

The need for “payment”

Section 80(1B) VATA provides for the recovery of VAT where “a person has for a prescribed accounting period (whenever ended) paid to the Commissioners an amount by way of VAT that was not VAT due to them…”. (Footnote: ²⁵) This Section considers whether, and if so how, Rank “paid” to HMRC an amount by way of VAT that was not VAT.

Rank could, of course, have appealed HMRC’s determination of Claims (i), (ii) and (iii). The reason it did not do so is because the Court of Appeal’s decision in Birmingham Hippodrome was made after the time for appeal had expired.

Rank, therefore, brings this claim, for £67.05m, under section 80(1B) VATA. In order to bring itself within section 80(1B) VATA, Rank must show that for a prescribed accounting period, whenever ended, it paid to HMRC an amount by way of VAT that was not VAT due. The critical question that arises is what – exactly – has Rank “paid” to HMRC that it now seeks to recover.

The “payment” in this case

Taking Claim (iii), once again, as an illustration, Rank contended that it had made a payment of £8.48m in respect of this claim in the following way: (Footnote: ²⁶)

Table 6: Payment by Rank

Rank contended that this constituted a “set-off” of cross-claims. Jowitt’s Dictionary of English Law (Footnote: ²⁷) defines “set-off” as:

“In an action to recover money, a set-off is a cross-claim for money by the defendant, for which he might sue the claimant. It has the effect of reducing or extinguishing the claimant’s claim by the amount of the cross-claim, so that he can only recover against the defendant the balance of his claim after deducting the amount owed by him to the defendant. Thus, if A sues B for £100, while he owes B £75, a set-off would have the effect of reducing A’s claim to £25. The object of this is to prevent cross-actions.”

The FTT, at [53] of the Decision, considered that whilst this was a case of set-off, set-off was not a payment within the meaning of section 80(1B) VATA. Rank’s case failed for that reason. We reach precisely converse conclusions on both points:

That is the case here, and we consider that the error that was made by HMRC could only have been corrected by way of an appeal.

RE-OPENING CLAIMS ALREADY DETERMINED

HMRC contended that Rank’s section 80(1B) VATA claim constituted an illegitimate re-opening or appealing of Claims (i), (ii) and (iii) and an attempt to circumvent the time limits that had prevented Claim (iv) from succeeding.

We deal with this point very shortly. Because of our conclusion on the question of whether Rank has made a payment under section 80(1B), Rank’s claim fails. In this sense, therefore, Rank has failed to “re-open” Claims (i), (ii), (iii) and (iv).

However, we stress that but for the question of “payment” (and subject to the relevant time-limits applicable to section 80(1B) VATA claims being complied with) we see do not see why Rank’s section 80(1B) VATA claim would constitute an illegitimate re-opening of claims already determined. The fact is that there is a close link between a claim made under section 80(1) VATA and the set-off provisions – which draw in transactions related because they arise out of the same mistake. If, contrary to the present case, misapplication of these provisions by HMRC resulted in a payment by a taxable person of an amount by way of VAT that was not VAT due, which was not reimbursed – or not fully reimbursed – by a claim under section 80(1) VATA, then we consider a further claim based upon section 80(1B) VATA would not be illegitimate at all.

DISPOSITION AND COSTS

For the reasons we have given, the appeal is dismissed.

Any application for costs in relation to this appeal must be made in writing within one month after the date of release of this decision. As any order in respect of costs will, if not agreed, be for a detailed assessment, the party making an application for such an order need not provide a schedule of costs claimed with the application as required by rule 10(5)(b) of the Tribunal Procedure (Upper Tribunal) Rules 2008.