FTT prevents HMRC from having two bites of the cherry!

In Lady Henrietta Pearson v HMRC [2014] UKFTT 890 (TC), the First-tier Tribunal (Tax Chamber) ('FTT') concluded that HMRC had "ignored" its previous decision by seeking to reduce the amount of a VAT refund which it had ordered HMRC make to Lady Henrietta Pearson ('the taxpayer').

Background

The taxpayer had converted a barn into a live-work unit, paying £40,233.18 in VAT on supplies in the process.  She sought to recover this VAT under section 35, Value Added Tax Act 1994 ('VATA'), which allows a VAT refund in respect of certain do-it-yourself building works.

HMRC refused to refund the VAT and the taxpayer appealed. After hearings on 11 October 2012 and 19 April 2013, the FTT allowed the taxpayer's appeal and ordered HMRC to refund the VAT in full. In finding that "the [taxpayer] has undertaken a residential conversion within the intended scope of [section 35 VATA]", the FTT also stated that "[n]o issue is taken about the amount of the claim; the only issue we are required to determine is whether the conditions on which a repayment may be made are satisfied".

Following the hearing, HMRC made a repayment to the taxpayer of £12,591.96, which was £27,641.22 less than the amount the taxpayer had successfully claimed should be refunded to her. In making the repayment, HMRC contended (for the first time) that the liability to refund VAT under section 35, VATA applied only to VAT properly chargeable and, in this case, the taxpayer's suppliers properly should only have charged VAT at 5% rather than at the full applicable rates at the time of the supplies. On this basis, HMRC refunded only £12,591.96 to the taxpayer, and stated that her only remedy for the balance was against the suppliers who had overcharged VAT.

FTT's decision

The FTT gave short shrift to HMRC's arguments. It noted that its decision in the original appeal ordering HMRC to repay £40,233.18 was unambiguous. During the course of that appeal, HMRC could have run an alternative argument based on the amount of any repayment to be made, but they chose not to do so. Nor had HMRC sought to appeal the FTT's decision by the usual route. Indeed, even if HMRC had sought to appeal the FTT's decision on the basis that the amount of the VAT repayment should be limited, they would have had to have sought permission to "raise a completely new point that had not been remotely addressed in either the first or second hearings". In addition, the FTT doubted that HMRC would have been granted permission to appeal on such a basis.

In the FTT's view, HMRC had simply "ignored the clear implication of the decision of the Tribunal after the second hearing, namely that the [taxpayer] won her appeal which was an appeal to receive her claimed refund of £40,233.18, and it is not in order to refuse a large part of the refund on a basis that HMRC had failed to raise in the concluded appeal".

In reaching this decision, the FTT did briefly consider the substance of HMRC's contention, notwithstanding its decision that HMRC had lost the opportunity to advance it. The FTT concluded that, had the contention been raised in the proper manner (i.e. during the original appeal), "HMRC was right to say that the VAT repayable under section 35 was properly limited in this way". However, this did not change the fact that it was now too late for HMRC to raise an entirely new argument.

Comment

HMRC's approach in this case was somewhat remarkable. Having failed to raise an alternative argument in relation to the original appeal, and having not sought to appeal that decision, HMRC took it upon themselves to unilaterally determine that the amount of VAT they had been ordered by an independent tribunal to refund to the taxpayer should be reduced.

This decision is a reminder of the finality of tribunal decisions and the importance of ensuring that all relevant legal arguments are before the tribunal at the relevant time, as the parties will not be permitted to re-litigate issues once the litigation has concluded and the time to appeal has passed.

As an aside, the FTT's decision also avoided the situation where the taxpayer might have sought to claim a refund of VAT from the suppliers for the difference between the (incorrect) amount charged and the (correct) 5% rate, yet the suppliers would by that stage have been out of time to claim a repayment of this amount from HMRC. This would have effectively meant that HMRC would have received the VAT twice, which clearly would have been unsatisfactory.