OUTPUT VAT - THE THREE YEAR CAP - CUSTOMS RELEASE BRIEF 07/2008

LAVAT e.Alert         Release Date: Monday 25th February 2008

We last issued an e.Alert on this issue on 24th January following the decision in the House of Lords in the case of Fleming and Condé Nast which considered recovery of Input VAT and the Three Year Cap. We advised that it was highly unlikely that local authorities would have made any significant errors through failure to recover input tax and that a 3 year cap in respect of Section 33 VAT recoveries had been properly introduced with an accompanying transitional period such that it was most unlikely that further adjustments would be available in this area. We considered the area where adjustments would be appropriate for local authorities is where errors had occurred in respect of output tax.

HM Revenue & Customs have now released Brief 07/2008 in which they confirm that the terms of the House of Lords judgment mean that claims may now also be made for output tax overpaid or overdeclared in accounting periods ending before 4 December 1996.

Relevant activities on which output tax may have been incorrectly declared by local authorities include –

• Car parking (pending, of course, the final outcome of current litigation)
• Car park excess charges
• Library services
• Domestic bulk waste
• Home improvement contributions
• HRG administration fees
• Cemetery services

As we now have certainty, those local authorities which have not yet submitted claims in respect of over-accounted output tax for periods prior to 4th December 1996 should now seriously consider doing so. If properly managed, even where limited records are available, the time/costs involved in undertaking such an exercise are not significant.

As advised in our earlier e.Alert of 24th January, some local authorities may already have submitted claims for recovery of over-accounted output tax by way of earlier Voluntary Disclosure and have had the claims, or part of the claims, “capped” by HMRC should the claims have included periods prior to 4th December 1996. These periods within the original Voluntary Disclosures should now be revisited and confirmation sought from HMRC that the amounts will now be paid.

Finally, many local authorities will be aware that where a taxpayer is entitled to interest on such repayments made by HMRC, there is currently much debate - following the House of Lords judgement in SEMPRA Metals - on whether such interest should be calculated on a simple, or compound, basis. The difference in value between the two can be substantial.

We will, of course, be discussing this at the next round of Local Authority VAT Forums in March. LAVAT, with our specialist knowledge of the sector, has already been involved with a number of our clients, assisting in the submission of claims to HMRC. Should you wish to discuss what impact these changes might have on your local authority or how claims might be compiled and submitted, please do get in touch with your usual LAVAT contact.