Tax law

Overpaid VAT and the three-year cap

Marks & Spencer plc v Commissioners of Customs & Excise Case C-62/00

The European Court of Justice (ECJ) recently ruled that the imposition with retrospective effect of a three-year limit on claims for recovery of overpaid VAT was incompatible with Community law.

The facts relating to the overpayment of VAT concerned the sale by Marks & Spencer of gift vouchers to companies at a price less than their face value.

Customs had taken the view that the value of the vouchers for VAT purposes was the face value of the vouchers and not the consideration paid for them.

However, Customs was forced to change its opinion by an ECJ ruling that in such cases the relevant amount upon which VAT should be charged was the consideration paid for the supply of the voucher not its face value (Argos Distributors [1996] Case C-288/94 ECR I-5311).

Marks & Spencer had paid VAT to Customs based on the face value of the vouchers.

By letter dated 3 October 1996, Marks & Spencer to Customs claiming repayment of VAT that it had overpaid between May 1991 and August 1996.

Customs, however, refused to repay amounts of overpaid VAT that were affected by the three-year limitation period announced on 18 July 1996 with retrospective effect.

The limitation period for reclaiming overpaid VAT had been reduced from six years to three by an amendment to s 80 Value Added Tax Act 1994 introduced by section 47(1) of the Finance Act 1997 for claims made on or after 18 July 1996.

Marks & Spencer challenged Customs in relation to their application of the three-year limitation period.

The ECJ stated that each member state should have its own detailed procedure rules as to how national charges wrongly levied should be repaid.

However, rules like these should not render virtually impossible or excessively difficult the exercise of rights conferred by Community law.

The ECJ ruled that transitional arrangements should have been introduced by the UK legislation allowing an adequate period after the enactment of the legislation for lodging the claims for repayment that persons were entitled to submit under the original legislation (in other words, applying the six-year limitation period).

The three-year limitation period had had the effect of depriving individuals of their right to repayment of overpaid VAT.

The relevant legislation had the retroactive effect of depriving individuals of any possibility of exercising a right that they had previously enjoyed with regard to repayment of VAT collected in breach of European law.

Comment

In response to the ECJ's ruling, Customs has issued Business Brief 22/2002, which retrospectively introduces a transitional regime for claims for repayment of overpaid VAT.

Customs has not sought to distinguish between claims for overpaid output tax and underclaimed input tax for the purposes of this regime.

The transitional regime provides that businesses that were affected by the retrospective application of the three-year limitation period may now reclaim VAT that was overpaid in the six years before 4 December 1996 where either: a claim was made before 31 March 1997, which was subject to a three-year limit (by restriction of claim or claw-back assessment); or no claim was made but the business can show that it found the error before 31 March 1997.

Note that all claims or further claims arising from the new transitional regime must be submitted by 31 March 2003.

The position for potential claimants will, however, be more complicated where there are unjust enrichment issues.

If, for example, a claimant's customers, rather than the claimant itself, have borne the burden of the overpaid VAT (that is to say, by paying too much VAT on supplies made to them by the claimant), Customs could deny that claimant repayment of overpaid VAT.

It is also problematic whether Customs can validly introduce a transitional regime retrospectively and could be open to further challenge by those unable to claim under the revised rules.

Businesses who consider that they may have a claim for overpaid VAT on the basis of Business Brief 22/2002 should review their records.

By Simon Hudd, Nicholson Graham & Jones, London