[2010] UKFTT 432 (TC)

								       TC00701

Appeal number:  LON/2008/0875

Value Added Tax – Refund of VAT charged at wrong rate – reclaim by supplier out of time – S80 VATA 1994 – appellant can only claim refund charged VAT – S35 VATA 1994 – correct rate on conversion work and material of non-residential to residential building is 5% - that amount refunded – reasonable expectation argument a matter for judicial review – Appeal dismissed 

FIRST-TIER TRIBUNAL

TAX

	C A M ANDERSON	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS 	Respondents

TRIBUNAL JUDGE:  DR K KHAN
                                                     RICHARD THOMAS

Sitting in public in London on 28 July 2010

C A M Anderson appeared in person

Christiaan Zwart, Counsel (instructed by HM Revenue and Customs Solicitors’ Office) appeared on behalf of the Respondents

© CROWN COPYRIGHT 2010

DECISION

Introduction
1.	The Appellant appealed against the Decision of the Commissioners for Her Majesty’s Revenue & Customs (“the Commissioners”) to refuse repayment of VAT in the sum of £8,551.56 claimed by the Appellant under the DIY Builders and Converters VAT Refund Scheme.  The dispute relates to 15 invoices on which VAT had been charged at an incorrect rate of 17.5% where the correct rate should have been 5%.  The building work undertaken was the conversion of a non residential building into a building “designed as a dwelling”.  

2.	The Appeal is dated 7 April 2008.  The Decision appealed against was contained in a letter from the Respondents dated 18 March 2008.  The original claim for repayment is dated 1 December 2006 for the amount of £20,563.81 with the sum of £8,551.56 not being refunded under Section 35(1) of Value Added Tax Act 1994 (“VATA”) on the grounds that the requirements of Sections 2(1), 29A and 58 of VATA were not met.  

Background

3.	The Appellant is not registered for VAT in respect of this appeal.  The Appellant’s company, Bucket and Spade Development Limited (“B and S”) is VAT registered.  The Appellant is involved in the business of the rental of commercial and residential property.  

4.	On 25th August 2005, the Appellant, in his capacity as Director of B and S wrote to the Commissioners explaining the development (Trelawney Court) undertaken by the company in 1998-1999 and enquiring whether the company could make a valid claim for VAT recovery on invoiced labour and material costs and whether the Commissioners would set aside a 3 year capping for a late claim.  He stated in correspondence that he understood that “VAT matters are capped after three years” and asked, given the particular circumstances, whether the three year capping rule could be set aside and a late claim allowed.  By letters of 7th September and 12th October 2005, the Commissioners advised the Appellant that there was no entitlement to recover input tax outside the three year limit provided in Section 80(4) VAT 1994 and there was no power to waive the rule in individual cases.

5.	On March 2006 an HMRC Officer visited B and S premises and established that VAT in respect of a DIY development had been incorrectly claimed on their VAT returns  An assessment was made accordingly since the claimed VAT related to the Treglines Development which was separate from the business of B and S and had been carried out by Mr. Anderson personally and is the subject of this appeal.  The Treglines Development related to the conversion of agricultural buildings into residential accommodation as the main residence of the Appellant.  Approval for this development was given in January 2003.

6.	On 21st March 2006 the Appellant was sent a copy of Notice 719 which relates to VAT refunds for DIY Builders and Converters and was relevant to  the Treglines Development.

7.	On 22nd  August 2007 the Commissioners received the Appellant’s DIY claim totalling £28,563.18 and supporting documentation.  The claim was in the name of the Appellant.  The Appellant’s accountants, Cornish Accounting Solutions (“CAS”), provided additional information as requested by the Commissioners in September 2007.  The documentation was in good order.

8.	On 23rd November 2007 the Appellant was notified that an amount of £17,852.34 would be refunded but £10, 711.40 of the amount claimed would be withheld.  Included in this amount was the VAT on 15 invoices totalling £8,551.56, disallowed because the incorrect VAT rate (17.5%) had been charged and because they were out of time ie over three years old.  In cases where the invoices were not time-barred, HMRC refunded 5% but refused the balance of 12.5%

9.	The Appellant, through his accountants CAS, stated that they understood the reasons for the disallowed VAT claim.  The correct rate that should have been charged in the invoices in the case of a DIY conversion of a non residential building into a new dwelling was the reduced rate of 5%.  CAS asked for a review since “it seems unfair that our client is penalised because he is outside of the time limit”.  They also made the point that the VAT officer, Mr A Beresford,  Higher Officer, advised that “all of the VAT on his DIY house building claim will be reclaimable”.  They stated that he confirmed on a compliments slip, attached to VAT Notice 719 (2002) that there was no time limit on the claim.  They said that these gave rise to exceptional circumstances.

10.	By letter on 10 January 2008, the Commissioners informed the Appellant that where VAT had been charged in error, the VAT cannot be refunded.

11.	There was further correspondence. CAS wrote to the Commissioners again on 16th January 2008 explaining that they were under the impression from the VAT Officer, Mr Beresford, that “all of the VAT on our client’s DIY House Builders Claim would be reclaimable” and further it was never the intention in European Law that “someone’s personal private residence would be within the scope of VAT”.  The Commissioners replied on 24 January 2008 to the effect that after consultation with the Birmingham DIY Team the matter was under review.  On 18th March 2008 the Commissioners explained that the DIY claim was in relation to the conversion of non-residential building into a dwelling and as such VAT should have been charged by the suppliers at the reduced rate of 5%, not at the rate of 17.5%.  They explained that 5% had been refunded but 12.5% would not be refunded.  Further some of the invoices were over three years old and the three year capping rule applied which meant that a certain amount of VAT was entirely irrecoverable.   They also pointed out that VAT Notice 719  confirmed this position, which is to say that you “should be careful to ensure that you are charged the correct amount of VAT, as you can only reclaim the VAT that has been correctly charged”.  On 23rd June 2008 the Commissioners stated that “the invoices are at the incorrect VAT rate, HMRC is only able to refund the amount of VAT that is correctly chargeable and applied.”  This is covered by VATA Section 35(1) and (1C).  Where VAT has been incorrectly charged by a supplier, it is only the supplier who can reclaim any VAT incorrectly charged.  This can only apply providing the supply is not over three years old.  Where the supply took place over three years ago, the supplier is unable to claim a refund from HMRC as any repayment is capped under the  Section 80 VATA 1994.   Section 80(4) states that the correct party to seek a refund is the supplier.

12.	On 7th April 2008 the Appellant filed a Notice of Appeal.

The Appellant’s submissions

13.	The Appellant makes the following points:
(1)	As stated in the Notice of Appeal, the Appellant says that Customs have rejected “part of my DIY claim unreasonably where they have received VAT charged in error by the suppliers”.

(2)	The Appellant had an expectation, albeit legitimate expectation, that he was compliant and all VAT claims were recoverable given the representations made by HMRC Higher Officer Alan Beresford.  The representation was made on a compliments slip attached to Notice 719 (2002) given that expectation, the Commissioners have acted unfairly.

The Commissioners’ submissions

14.	The Commissioners make the following submissions:
(1)	Pursuant to Section 35(1) VATA 1994, a refund of VAT under the DIY system can only be made when the amount of VAT on the invoice has been correctly charged.  On the 15 invoices in dispute, the Appellant was incorrectly charged VAT at the standard rate of 17.5%.  Given that the property development was a conversion of non-residential building into a dwelling, Section 35(1C) and Schedule 7A Group 6 item 1 and 2 VATA 1994 applied.  The supply of work and fittings are liable to VAT at the reduced rate of 5%.  The DIY Scheme allows a recovery of VAT when goods (building materials) are incorporated in the building  or used in its construction.  The building materials on which the VAT is recoverable are stated in Schedule 7A Group 6 Note 12, VATA 1994.  The invoices correctly claimed for the supply of labour and materials, roofing/electrical work, plumbing and the supply and fitting of glazing.  All are within the scope of the reduced rate.

(2)	The Appellant has been refunded 5% of the VAT which was correctly charged under the DIY Scheme.  12.5% was incorrectly charged and cannot be refunded directly to the Appellant.  The proper procedure for recovering VAT which has been charged in error is for the Appellant to go back to the supplier and request a refund of the incorrectly charged VAT, whereupon the Commissioners would allow the supplier to make a credit adjustment to their VAT account, providing that the supplier is within the time limit to do so pursuant to Section 80(4) VAT 1994.  In this case, the invoices in dispute are over three years old and therefore a credit adjustment is out of time.

(3)	As regards the representations which the Appellant say that Mr Beresford has made, reliance on which is said to create a reasonable expectation, the Commissioners say that this is not a matter within the jurisdiction of the Tribunal.  It is properly a matter for judicial review and public law.  Further, Mr Beresford provided the Appellant with Notice 719 (2002)  which outlines the requirements of a DIY claim. It is the Appellant’s responsibility to ensure that the proper requirements for a DIY claim are met.  

15.	Accordingly, the Commissioners submit that the Appeal should be dismissed .

The Law

16.	Section 29A VATA 1994 – Reduced Rate
 “(1)	VAT charged on—
(a)	any supply that is of a description for the time being specified in Schedule 7A, or
(b)	any equivalent acquisition or importation,
shall be charged at the rate of 5 per cent.”
(2) Section 35 VATA 1994 – Refund of VAT to persons constructing certain buildings.  
	“(1) Where –
	(a)	a person carries out works to which this section applies,
	(b)	his carrying out of the works is lawful and otherwise 	than in the course of furtherance of any business, and
	(c)	VAT is chargeable on the supply, acquisition or 	importation of any goods used by him for the purposes 	of the works,
	the Commissioners shall, on a claim in that behalf, refund to 	that person the amount of VAT so chargeable. [Emphasis 	supplied]	
	(1A) The works to which this section applies are –
(a)	the construction of a building designed as a dwelling or number of dwellings;
(b)	the construction of a building for use solely for a relevant residential purpose or relevant charitable purpose; and
(c)	a residential conversion.
 (1B) For the purposes of this section goods shall be treated as used for the purposes of works to which this section applies by the person carrying out the works so far only as they are building materials which, in the course of the works, are incorporated in the building in question or its site.
(1C) NOT RELEVANT
(1D) For the purposes of this section works constitute a residential conversion to the extent that they consist in the conversion of a non-residential building, or a non-residential part of a building not—
(a)	a building designed as a dwelling or a number of dwellings;
(b)	a building intended for use solely for a relevant residential purpose; or
(c)	anything which would fall within paragraph (a) or (b) above if different parts of a building were treated as separate buildings.
(2)  The Commissioners shall not be required to entertain a claim for a refund of VAT under this section unless the claim—
(a)	is made within such time and in such form and manner, and
(b)	contains such information, and
(c)	is accompanied by such documents, whether by way of evidence or otherwise, as the Commissioners may by regulations prescribe or, in the case of documents, as the Commissioners may determine in accordance with the regulations.
(3) This section shall have effect-
(a)	as if the reference in subsection (1) above to the VAT chargeable on the supply of any goods included a reference to VAT chargeable on the supply in accordance with the law of another member State; and
(b)	in relation  to VAT chargeable in accordance with the law of another member State, as if references to VAT to any person were references to paying that person an amount equal to the VAT chargeable in accordance with the law of that member State;
and the provisions of this Act and of any other enactment or subordinate legislation (whenever passed or made) so far as they relate to a refund under this section shall be construed accordingly.
	(4) The Notes to Group 5 of Schedule 8 shall apply for construing this section as they apply for construing that Group but this is subject to subsection (4A) below.
	(4A) The meaning of “non-residential” given by Note (7A) of Group 5 of Schedule 8 (and not that given by Note (7) of that Group) applies for the purposes of this section as if-
(a)	references in that Note to item 3 of that Group were references to this section, and
(b)	paragraph (b)(iii) of that Note were omitted.”

(3) Section 80 VATA 1994 – Credit for, or repayment of, overstated or overpaid VAT. 
“(1)	Where a person
(a)	has accounted to the Commissioners for VAT for a prescribed accounting period (whenever ended), and
(b)	in doing so, has brought into account as output tax an amount that was not output tax due,
the Commissioners shall be liable to credit the person with that amount.
(1A)	Where the Commissioners – 
(a)	have assessed a person to VAT for a prescribed accounting period (whenever ended), and
(b)	in doing so, have brought into account as output tax an amount that was not output tax due, 
they shall be liable to credit the person with that amount.
(1B)	Where a person has for a prescribed accounting period (whenever ended) paid to the Commissioners an amount by way of VAT that was not VAT due to them, otherwise than as a result of—
(a)	an amount that was not output tax being brought into account as output tax, or
(b)	an amount of input tax allowable under section 26 not being brought into account,
the Commissioners shall be liable to repay to that person the amount so paid.
(2)	The Commissioners shall only be liable to (credit or] repay an amount under this section on a claim being made for the purpose.
(2A)	Where—
(a)	as a result of a claim under this section by virtue of subsection (1) or (1A) above an amount falls to be credited to a person, and
(b)	after setting any sums against it under or by virtue of this Act, some or all of that amount remains to his credit,
the Commissioners shall be liable to pay (or repay) to him so much of that amount as so remains.
(3)	It shall be a defence, in relation to a claim [under this section by virtue of subsection (1) or (1A) above, that the crediting] of an amount would unjustly enrich the claimant.
(3A)	Subsection (3B) below applies for the purposes of subsection (3) above where—
(a)	an amount would (apart from subsection (3) above) fall to be credited under subsection (1) or (1A) above to any person (“the taxpayer”), and
(b)	the whole or a part of the amount brought into account as mentioned in paragraph (b) of that subsection has, for practical purposes, been borne by a person other than the taxpayer.
(3B)	Where, in a case to which this subsection applies, loss or damage has been or may be incurred by the taxpayer as a result of mistaken assumptions made in his case about the operation of any VAT provisions, that loss or damage shall be disregarded, except to the extent of the quantified amount, in the making of any determination—
(a)	of whether or to what extent the crediting of an amount to the taxpayer would enrich him; or 
(b)	of whether or to what extent any enrichment of the taxpayer would be unjust.
(3C)	In subsection (3B) above—
	“the qualified amount” means the amount (if any) which is shown by the taxpayer to constitute the amount that would appropriately compensate him for loss or damage shown by him to have resulted, for any business carried on by him, from the making of the mistaken assumptions; and
	“VAT provisions” means the provisions of-
(a)	any enactment, subordinate legislation or Community legislation (whether or not still in force) which relates to VAT or to any matter connected with VAT; or 
(b)	any notice published by the Commissioners under or for the purposes of any such enactment or subordinate legislation.
(4)	The Commissioners shall not be liable on a claim under this section—
(a)	to credit an amount to a person under subsection (1) or (1A) above, or 
(b)	to repay an amount to a person under subsection (1B) above,
if the claim is made more than 3 years after the relevant date.
(4ZA)	The relevant date is—
(a)	in the case of a claim by virtue of subsection (1) above, the end of the prescribed accounting period mentioned in that subsection, unless paragraph (b) below applies;
(b)	in the case of a claim by virtue of subsection (1) above in respect of an erroneous voluntary disclosure, the end of the prescribed accounting period in which the disclosure was made;
(c)	in the case of a claim by virtue of subsection (1A) above in respect of an assessment on the basis of an erroneous voluntary disclosure, the end of the prescribed accounting period in which the disclosure was made;
(d)	in the case of a claim by virtue of subsection (1A) above in any other case, the end of the prescribed accounting period in which the assessment was made;
(e)	in the case of a claim by virtue of subsection (1B) above, the date on which the payment was made.
In the case of a person who has ceased to be registered under this Act, any reference in paragraphs (b) to (d) above to a prescribed accounting period includes a reference to a period that would have been a prescribed accounting period had the person continued to be registered under this Act.
(4ZB)	For the purposes of this section the cases where there is an erroneous voluntary disclosure are those cases where—
(a)	a person discloses to the Commissioners that he has not brought into account for a prescribed accounting period (whenever ended) an amount of output tax due for the period;
(b)	the disclosure is made in a later prescribed accounting period (whenever ended); and
(c)	some or all of the amount is not output tax due.
(4A)	Where—
(a)	an amount has been credited under subsection (1) or (1A) above to any person at any time on or after 26th May 2005, and
(b)	the amount so credited exceeded the amount which the Commissioners were liable at that time to credit to that person,
the Commissioners may, to the best of their judgement, assess the excess credited to that person and notify it to him.
(4AA)	An assessment under subsection (4A) shall not be made more than 2 years after the later of—
(a)	the end of the prescribed accounting period in which the amount was credited to the person, and
(b)	the time when evidence of fact sufficient in the opinion of the Commissioners to justify the making of the assessment comes to the knowledge of the Commissioners.
(4B)	……….
(4C)	Subsections (3) to (8) of section 78A apply in the case of an assessment  under subsection (4A) above as they apply in the case of an assessment under section 78A(1).
(5)	……….
(6)	A claim under this section shall be made in such form and manner and shall be supported by such documentary evidence as the Commissioners prescribe by regulations; and regulations under this subsection may make different provisions for different cases.
(7)	Except as provided by this section, the Commissioners shall not be liable to credit or repay any amount accounted for or paid to them by way of VAT that was not VAT due to them.
(4)	Schedule 7A, VATA 1994 

“Part I
Index to Reduced-Rate Supplies of Goods And Services
	   .......
Residential conversions				Group 6
	   ........
Part II
Group 6
Residential Conversions
Item No.
1.	The supply, in the course of a qualifying conversion, of qualifying services related to the conversion.
2.	The supply of building materials if-
(a)	the materials are supplied by a person who, in the course of a qualifying conversion, is supplying qualifying services related to the conversion, and
(b)	those services include the incorporation of the materials in the building concerned or its immediate site.
Notes:
		Supplies only partly  within Item 1
1—
(1)	Sub-paragraph (2) applies where a supply of services is only in part a supply to which item 1 applies.
(2)	The supply, to the extent that it is one to which item 1 applies, is to be taken to be a supply to which item 1 applies.
(3)	An apportionment may be made to determine that extent.
2—	Meaning of “qualifying conversion”
(1)	A “qualifying conversion” means—
(a)	a changed number of dwellings conversion (see paragraph 3);
(b)	a house in multiple occupation conversion (see paragraph 5); or
(c)	a special residential conversion (see paragraph 7).
(2)	Sub-paragraph (1) is subject to paragraphs 9 and 10.
3—	Meaning of “changed number of dwellings conversion” 
(1)	A “changed number of dwellings conversion” is—
(a)	a conversion of premises consisting of a building where the conditions are specified in this paragraph are satisfied, or
(b)	a conversion of premises consisting of a part of a building where those conditions are satisfied.
(2)	The first condition is that after the conversion the premises being converted contain a number of single household dwellings that is—
(a)	different from the number (if any) that the premises contain before the conversion, and
(b)	greater than, or equal to, one.
(3)	The second condition is that there is no part of the premises being converted that is a part that after the conversion contains the same number of single household dwellings (whether zero, one or two or more) as before the conversion.”

Conclusion

17.	The issues involved in this case are straightforward.  The Tribunal therefore proposes to give a summary of their findings with some explanation of the underlying law.  

18.	The Tribunal believes in the circumstances the Appeal should be dismissed for the following reasons:

19.	The Appellant cannot seek a refund of VAT which has been incorrectly charged to him by his contractors/suppliers.  Where, as in this case, the Appellant has paid the invoices of the supplier then he should properly request repayment from the supplier of the VAT element which was not due on those supplies.  The Appellant is not himself entitled to a refund and could not, as it were, stand in the shoes of the supplier to benefit from that entitlement.  (See Christopher John Alan v The Commissioners (Ref 17342).  Tax at the rate of 17.5% was not due and therefore should not have been paid.  The matter concerns the rate of tax charged by the supplier and therefore does not properly fall within Section 83, VATA 1994 as a ground for appeal by the Appellant.  The Tribunal therefore does not have jurisdiction in that matter.  The matter is an internal one between the supplier and the Appellant.

	20.	The Tribunal has no power to look at the legitimate expectation argument.  Further, the law in this area is not settled and issues involving matters of public law  would properly form the basis of a judicial review rather than come within the jurisdiction of the Tribunal.

21.	Further, the Commissioners provided through Mr Beresford a copy of Notice 719, dealing with DIY Builders and Converters, which clearly lays out the rules which are applicable in this case.  The obligation is on the taxpayer and their advisers to get their VAT returns right and to properly check their claims and the invoices on which those claims are made.  The person carrying out the Scheme has to properly file a return in accordance with the guidelines provided in the relevant notices and in law.  For this reason, a Help Line number is provided whereby the taxable person can make enquiries.  Further, the Officer involved in this case, Mr Beresford provided his own contact details for clarification on any matters relating to the DIY Scheme, which from his oral evidence, is administered by contacting the Birmingham office which deals with the law and policy issues relating to the Scheme.  It is unfortunate that the Notice which was provided to the taxpayer did not contain the changes which were made in 2005 which clearly stated that the time limit for making a claim is three years.  

22.	However the Appellant understood at a very early stage that this was the case and had advice from his accountants CAS, on this very matter.  The correspondence confirms this understanding.  The Notice clearly states that it is up to the taxable person to ensure that they are charged the correct amount of tax, file returns on time, and ensure they are compliant with the law in making claims.  The taxable person in this case has those obligations.  Where there has been an error, it is up to the taxpayer to pick up on those errors with their advisers and to make the necessary corrections before filing the relevant forms to the Commissioners. Overcharged VAT is claimed from the supplier who in turn reclaims from HMRC.

23.	 The Commissioners have refunded  5%  of  the claimed input VAT( which was the correct rate to be charged under the DIY Scheme) and the remaining 12.5% which was incorrectly charged cannot be refunded directly to the Appellant.  It is up to the Appellant to reclaim the overcharged VAT from the supplier who in turn can, in principle, claim a refund from HMRC, but that is subject to the requisite time limits.  The Tribunal believes that the Commissioners acted in good faith in repaying part of the input VAT claimed since an invoice with the incorrect rate of tax cannot be considered a correct and legal invoice for the purposes of the reclaiming of VAT.

24.	It is unfortunate in this case that the time allowed for the supplier to make a credit adjustment pursuant to Section 80, VATA 1994 had passed.  The invoices in dispute, those over three years old, cannot therefore be the subject of a credit adjustment on the supplier’s VAT account.

25.	The amount recoverable under the DIY Scheme and pursuant to Section 35 VATA 1994 can only be input tax based on the charging on VAT at the correct rate and such rate is shown on the invoice evidencing the payment.  The taxable person therefore only has a right to recover the amount of VAT which has been properly charged.  There were 15 invoices where the amount charged to VAT was incorrectly charged.  The Tribunal does not believe that the 12.5% which was incorrectly charged represented an unintended windfall for the Commissioners since there are procedures in place to deal with such payments through the Credit Adjustment Scheme.  However there is no entitlement to recover such sums outside the three year limit period.  With such invoices, neither the supplier nor the Commissioners are able to refund any incorrect charged VAT due to the capping rules.  

26.	Mr Beresford, Higher Officer, HMRC made clear in his oral evidence that he worked with the Appellant’s accountants and thoroughly checked all  submitted invoices and gave the Tribunal the assurance that the correct amount of VAT was refunded to the Appellant.  He explained that there is a special office dealing with DIY claims in Birmingham and these claims were reviewed by that office.  

27.	In the circumstances, the Tribunal believes that the assessment should be upheld and the appeal dismissed accordingly.

28.	The Tribunal wishes to note the case was very well presented and prepared by the Counsel on behalf of the Commissioners, Christiaan Zwart and the solicitors involved and wishes to thank the Commissioners for their orderly and thorough presentation.  

29.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

     
 
                        DR K KHAN		
RELEASE DATE:15 September 2010