The debate that has raged for more than 15 years since Parliament introduced the controversial three-year time limit on claims for repayment of VAT came under the legal spotlight as a local authority tried – but failed – to win back tax payments it made in error in respect of the supply of a wide range of public services.
What became known as the ‘three-year cap’ was made law by Parliament as long ago as 1996, with retrospective effect and with no provision for transitional relief, and has been the source of discontent, and a great deal of litigation, ever since.
Leeds City Council sought repayment of VAT that it had paid in error on services ranging from the provision of cemetery memorials to library, excess parking and trade waste collection charges. Its claims spanned periods from 1977 to 2009.
HM Revenue and Customs (HMRC) did not dispute that substantial sums in VAT had been erroneously paid. However, it declined to reimburse the council in respect of claims for repayment that fell foul of the three-year cap. The council unsuccessfully challenged HMRC’s stance before the First-tier Tribunal.
On appeal to the Upper Tribunal (UT), the council argued, amongst other things, that the manner in which the three-year cap was implemented offended fundamental principles of European Union (EU) law and did not strike a proper balance between the right of the state to achieve finality and the rights of taxpayers to fair treatment.
However, in dismissing the council’s challenge, the UT rejected arguments that the time limit was disproportionate and breached legitimate expectations. There was no EU law impediment to the introduction of the three-year cap and it was not arguable that the public position adopted by HMRC had made it impossible or excessively difficult for taxpayers to assert their rights within the time limit.
The council’s failure to claim the relevant repayments in time had nothing to do with legal uncertainty regarding the effect of the three-year cap but was attributable to its confusion as to the correct tax treatment of the various supplies. It was equally clear that a time limit which ran from the date of payment, rather than discovery of the error, was unobjectionable. Complaints that the period laid down for the recovery of overpaid VAT was shorter than periods prescribed in respect of other types of tax were irrelevant.