Upper Tribunal considers whether compromise agreement precluded VAT recovery assessment

VAT Cost Saving Exemption

The Upper Tax Tribunal recently considered whether HMRC was entitled to issue an assessment to recover amounts of VAT paid to the taxpayer in error.

The taxpayer, a supplier of dental nurses to dental practices, submitted a claim for repayment of overpaid VAT. This was on the basis that its supplies should have been treated as exempt from VAT, when they had treated them as being standard-rated, The taxpayer had argued that it would not be unjustly enriched by being paid the full value of its claim. Notwithstanding this, the taxpayer eventually accepted (on a ‘without prejudice’ basis) a proposal from HMRC to repay 74% of the claim.

HMRC subsequently considered that the taxpayer had been correct to charge VAT on its supplies. There had therefore been no overpayment of VAT and the amounts paid to the taxpayer had been paid erroneously. HMRC, therefore, issued an assessment in respect of the incorrectly paid amounts.

The First-tier Tribunal had held that HMRC entered into a binding compromise agreement in full and final settlement of the taxpayer’s VAT repayment claim, and was therefore prevented from issuing a VAT recovery assessment. The Upper Tribunal endorsed this decision, determining that VAT law did not prevent HMRC from entering into a binding agreement with the taxpayer; that such a compromise agreement would not have been void; and that, on the facts, a contractual agreement had been entered into.

This decision will be of interest to any businesses that have reached (on a ‘without prejudice’ basis) a compromise agreement with HMRC on the amount of a VAT repayment claim, where it subsequently transpires that the amount paid by HMRC was paid in error.

If HMRC is seeking to impose a tax penalty on you, it really is worth considering if anything can be done to fight it. Should you wish to discuss your situation, please do not hesitate to contact a member of our tax team on 0845 177 5000 or by using our  on-line contact form

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