UK: Dorsey London Tax Update

This update was originally published in January 2008.

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Fleming and Condé Nast: Taxpayer Wins

In Marks and Spencer v Customs and Excise the ECJ found UK legislation which retrospectively reduced the period for making a VAT repayment claim from 6 to 3 years was incompatible with community law because it lacked a transitional period to enable claimants to make claims under the old time limit before the new one took effect.

This left residual questions. Could the legislation be "repaired" through the Court imputing a transitional period in the absence of provision in the legislation? Does the absence of transitional arrangements mean that the new 3 year time limit cannot be applied at all or can it apply where claims were not issued during what would have been an adequate transitional period if one had been given? Where claims were issued outside what would have been a reasonable transitional period, do claimants need to show that they would have issued their claims earlier if they had known that there should have been such transitional provisions?

In its judgments today the House of Lords (by 4 to 1) has concluded:

• a reasonable transitional period cannot be read into the legislation; • accordingly the retrospective legislation reducing the time limit cannot be applied;
• before the reduced time limit could take effect Parliament or HMRC must now introduce a reasonable transitional period;
• taxpayers do not need to show what they would have done if the legislation had been different

Implications for VAT Claims

VAT claims for underpaid input tax can now be submitted for all periods up to and including May 1997; the same should also be true for overpaid output tax (notwithstanding certain crumbs of comfort for HMRC in certain of the judgments).

Implications for Direct Tax Claims

The cases also have major implications for direct tax claims where time limits have similarly been reduced by retrospective means without transitional periods.

Above all, they provide strong support for the argument that s320 FA 04 and s107 FA 07, which retrospectively reduced the period for making mistake of law restitution claims, are invalid and are therefore inapplicable regardless of when the claims were issued.

More generally, they add support to the argument that HMRC and the lower courts must adopt a flexible approach to time limits and formal requirements in relation to claims in areas such as cross-border group relief, thin capitalization and ACT Class 2.

For clients with current claims a note will follow on the impact upon your specific claim.

Issuing New Claims

The implication is that retrospective attempts to restrict time periods are currently ineffective. Claimants who have been awaiting this judgment before issuing claims effected by such changes (e.g. s320 FA 04) may well wish to consider doing so particularly with the recommendation in this judgment that Parliament or HMRC should now introduce a transitional period to shut the door.

Other Recent Hearings

The ACT Class 2 appeal to the Court of Appeal concerning the mechanism for assessing claims ended today. Judgment has been reserved to be handed down in writing. No date has been given.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.