18677

Return – Correction of VAT account for earlier errors – Assessment disallowing adjustment – Limitation period for correction – Retrospective reduction to three years – Compatibility with Community law principle of effectiveness – Marks & Spencer [2002] STC 1036 considered – VAT Regs 1995, r.34 – Assessment reduced
LONDON TRIBUNAL CENTRE

	M M L SYSTEMS	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	THEODORE WALLACE   (Chairman)
						 MRS E R ADAMS FCA FTII

Sitting in public in London on 4 June 2004

David Powys-Lybbe, partner, for the Appellant 

Caroline Neenan, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	This was an appeal against an assessment of £4,472 VAT for the period to 31 January 2000 notified on 4 October 2001.

2.	The assessment was made on the basis that adjustments made by the Appellant in the return for 01/00 in respect of earlier periods going back to 1994 were capped by the three year time limit which took effect from 1 May 1997. The adjustments reduced the net VAT payable by £3,191.37 to £648.56. The assessment disallowed the adjustments for input tax and output tax attributable to periods 01/97 and before.

3.	The assessment followed a visit on 29 August 2001 when a Customs officer inspected the Appellant’s records and was provided with a spreadsheet showing the adjustments made. The unadjusted figures for period 01/00 were £4,773.10 and £929.17 input tax. The figures on the return were £2,944.98 output tax, a net reduction of £1,828.12, and £2,292.42 input tax, a net increase of £1,363.25.  The adjustments were net because some output figures were increased and some input figures were reduced.

4.	The assessment disallowed net output tax reductions of £1,795.51 and net input tax increases of £2,678.95. The assessment disallowing adjustments was thus greater than the total net adjustment made.  It was clear that this could not be correct.

5.	Following a brief adjournment when Mr Powys-Lybbe explained to Customs the spreadsheet showing the adjustments in fact made, Miss Neenan accepted that the assessment should be reduced to £1,752.26.

6.	Although the adjustments went back to period 01/94, it is apparent from the spreadsheet and a further schedule produced by the Appellant for the hearing that in respect of all periods before 01/96 the adjustments showed a net increase of VAT of just £2.61, the adjustments before then being mainly timing between one period and another.

7.	For period 01/96 the adjustment showed a net reduction of VAT £167.78 with both output and input tax reduced; for 04/96 there was reduction of £123.05 due to increased input tax; the next period showed a reduction of £377.11 in input tax resulting in increased VAT and 10/96 showed a reduction of £1,841.15 in output tax.  It appears that the errors had been due to posting or computer programming.

8.	Mr Powys-Lybbe said that he had thought that he had six years to correct the errors and that although he had received VAT Notes No.2 (1997) which stated that there was a three year cap on refunds of overpaid VAT he did not realise that this was retrospective and applied to periods before 1 May 1997 when the changes came into effect.  He said that the notes were difficult to understand without clear guidance.

9.	Miss Neenan said that the announcement of a three year cap on repayments of VAT was included in VAT Notes No.3 (1997) published in [1996] STI on 10 October 1996; if  Mr Powys-Lybbe was unsure as to what it meant he could have sought advice.

10.	She produced a helpful skeleton argument citing the decision of the Court of Appeal in Marks and Spencer plc and the University of Sussex v Customs and Excise Commissioners [2004] STC 1 and the Court of Justice in Grundig Italiana SpA v Ministero delle Finanze (Case C-255/70) [2003] All ER (EC) 176.

Conclusions

11.	The adjustments made by the Appellant in his return for the period to 31 January 2000 were not made on a claim under section 80 of the VAT Act 1994 nor was any late claim made under regulation 29 of the VAT Regulations 1995.

12.	It follows that the adjustments were made under regulation 34.

13.	Regulation 34(3) provides,

“(3)	Where, in relation to all such overstatements or understatements discovered by the taxable person during a prescribed accounting period, the difference between –

(a)	under-declarations of  liability, and
(b)	over-declaration of liability,

does not exceed £2,000, the taxable person may correct his VAT account in accordance with this regulation.”

The limit of £2,000 was thus exceeded; however no point was taken on this and the adjustment of £3,191.37 as reduced to £1,439.11 by the amended assessment of £1,752.26 is within that limit.  

14.	Regulation 34(1A), which was inserted by the VAT (Amendment) Regulations 1997 with effect from 1 May 1997, provides,

“(1A)	Subject to paragraph (1B) below, any overstatement or understatement in a return where –

(a)	a period of 3 years has elapsed since the end of the prescribed accounting period for which the return was made, and
(b)	the taxable person has not (in relation to that overstatement or understatement) corrected his VAT account in accordance with this regulation before the end of the prescribed accounting period during which that period of 3 years has elapsed,

shall be disregarded for the purposes of this regulation; …”

Paragraph (1B) excluded the cap for periods beginning before 1 May 1997 where the return was due after that date.

15.	In Marks and Spencer plc v Customs and Excise Commissioners (Case C-62/00) [2002] STC 1036, the Court of Justice said at paragraph 38 that a reduction in the period within which a repayment claim may be sought is not incompatible with the principle of effectiveness provided that the limitation period is reasonable and that there are transitional arrangement for lodging claims which could be made previously. Earlier the Court said that a three year limitation period was reasonable, see paragraph 35.

16.	We can see no valid distinction between the reduction of the period to make a claim to three years and the introduction of a three year limitation period where there was none before.

17.	Returning to the present case, the Appellant’s adjustments to the return for 01/00 reduced his net liability to VAT by £3,191.37 of which £1,752.26 was attributable to periods 01/96 to 10/96 which ended more than 3 years before period 01/00 and the balance was for later periods.

18.	Immediately before the amendment in 1997 to regulation 34 the Appellant would have been able to adjust his VAT account subject to the £2,000 limit under regulation 34(3).  At that time it would have had until 2002 to act.  The effect of the introduction of regulation 34(1A) was that it had to make any adjustment within 3 years of the relevant period.  Any adjustment to 01/96 had to be made by period 01/99, which is 20 months after the amendment took effect.  Although strictly speaking this was not a transitional period, its effect was the same in that it gave the Appellant an adequate opportunity to make the adjustments with which this appeal was concerned.

19.	We are satisfied that the application of regulation 34(1A) in the present case did not conflict with the principle of effectiveness in Community Law.

20.	Different considerations would have arisen if the adjustments had reduced the Appellant’s liability to tax in respect of periods 01/94 to 07/94 since on the basis of paragraph 39 in Grundig Italiana SpA six months is the minimum transitional period during which Community law rights previously available must be exercisable in order to comply with the principle of effectiveness.

21.	The fact that the Appellant did not realise the effect of the change in 1997 does not affect the fact that the law was changed.  No misdeclaration penalty was assessed and default interest was inhibited.

22.	The result is that the assessment is reduced by agreement to £1,752.26.  

THEODORE WALLACE
CHAIRMAN

RELEASED: 01/07/2004

LON/03/477