VAT ruling blow for Customs

Customs & Excise faces a last-minute flood of VAT repayment claims before Budget Day after a High Court judge ruled that its refusal to honour payments, agreed before the three-year rule was introduced, was illegal.

Mr Justice Keene’s judicial review decision is a major blow for Customs, which had halted all repayments beyond three years, including those it had already agreed with claimants.

The Government department lost its controversial claim that the UK’s courts lacked the power to make it repay the money to opticians, mail order companies Kay and Great Universal Stores and drinks conglomerate Allied Domecq. The defeat is set to cost Customs up to u35m, a spokesman said.

But even as the review winners celebrated on Tuesday afternoon, Customs warned that it would seek to reclaim the payments once the three-year rule, introduced retrospectively and without consultation on 18 July, becomes provisional law. Chancellor Kenneth Clarke will outline legislation for the new rule in his Budget next Tuesday.

A Customs spokesman said: ‘The decision does not mean the three-year rule is illegal. There will be a provision to claw back any payments made between 18 July and the time of parliamentary approval.’

Ernst & Young’s national VAT partner Peter Jenkins said the three-year rule remained unscathed by the judgment. ‘People should get their claims in and force Customs to pay before the Provisional Collection of Taxes Act comes into play soon after the Budget,’ he advised.

‘There will be a rush to get the claims through before the Budget, but Customs are bound to drag their feet over this. It will be interesting to see if Customs sticks to its guns or takes the sensible course and accepts that its proposals are basically flawed,’ he said.

Binder Hamlyn VAT partner and president of the VAT practitioners group Alan Buckett also urged claimants to act before Budget Day. ‘I hope that Customs do the decent thing and forget 18 July and apply it from next Tuesday only.

‘Customs should realise the policy is ill-founded and start again. It is appalling and Customs underestimated the anger of taxpayers over this.’

REACTION

Coopers & Lybrand VAT consultant Harinder Kaur: ‘It would be absurd if Customs went off and tried to implement its clawback as they will have to raise assessments.’

Deloitte & Touche’s head of VAT Tony McClenaghan on Customs’ clawback intention: ‘It’s a deplorable new departure for UK revenue gathering.’

KPMG’s head of indirect tax George Michie: ‘Taxpayers should not be put off demanding repayment now. There is doubt whether any clawback legislation would be permissible under European law.’

Price Waterhouse VAT practice head Richard Watson: ‘There’s a big question about the legality of the clawback.’

Moret Ernst & Young’s director of European VAT services John Arnold: ‘The saga in the courts of the unspeakable in pursuit of the incredible will doubtless continue.’