New attack on VAT rule

Senior accountants plan a second assault on Customs & Excise’s three-year rule at a no-nonsense meeting with the Government department’s VAT policy head Martin Brown on Monday.

This follows stinging criticism this week of Customs & Excise’s ‘over-implementation’ of the controversial diktat on limiting repayments by a leading VAT expert which won backing from other tax practitioners.

The attack is contained in an open letter (right) from Richard Watson, head of Price Waterhouse’s VAT practice, to Brown, highlighting the extent to which the new rule has been applied.

Watson claims that Customs has gone far beyond the original ministerial intent of the limit introduced in July, which is designed to restrict taxpayers’ claims for VAT paid in error to three years.

According to Watson, Customs has used the proposed legislation to refuse claims in a number of areas, including bad debt relief for supplies, pre and post-registration input tax and input tax on buildings.

He told Accountancy Age: ‘The rule is designed to stop the massive outflow of money seen in recent high-profile cases. But what Customs is actually doing is stopping all sorts of other things which don’t actually relate to changes in the law.’

The profession first revealed its opposition at a frosty meeting with Brown in August. It is due to become legislation in November.

Coopers & Lybrand VAT partner Penny Hamilton, who last week formed a formidable opposition group of concerned business clients, welcomed Watson’s letter.

‘The Big Six are trying to co-operate on this and we are working with each other and on behalf of our individual clients,’ she said. ‘But it is very important that the point is made in every way possible in the hope that somebody, somewhere is listening. I do not see how Customs, at the moment, has any legal basis for carrying out any of its proposals.’

George Michie, head of indirect tax at KPMG, said bad debt relief was a particular concern. ‘It’s directly contradicting statements made by a Government minister,’ he complained. ‘If Customs was more sensible about this, it could take a lot of steam out of the issue. Symmetry in terms of powers, sensible transitional provisions, and only applying the new rules to areas where tax is paid in error would really help.’

Ernst & Young’s senior litigation manager Leslie Allen added: ‘Ministerial intention was to deal with some of the large cases going through, but Customs is interpreting this in a very harsh manner.

‘It is looking at a lot of circumstances which were never intended to be caught by the proposed legislation. Customs is using it in a way which is clearly inequitable and to try to put right things which were wrong in other areas.’

The three-year rule will come up against its first major legal challenge next week at a London VAT tribunal.

Tax lawyer Hugh Mainprice will argue the case that Customs’ treatment of supplies made to The Royal College of Gynaecologists and Obstetricians since 1973 was incorrect. The profession will be watching closely.