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Lack of records could be barrier to overpaid VAT claims 2

Fundraising | Ian Allsop | 1 Jan 2008

A VAT expert has warned that a lack of detailed records may prevent some charities benefiting from a recent House of Lords decision that could see them entitled to reclaim millions in overpaid tax.

Last week charities which believed they overpaid VAT at any point between 1973 and 1996 were urged to seek expert guidance following a Lords ruling in the Fleming and Condé Nast cases.

The judgment concluded a battle that began nearly 12 years ago when HMRC announced that claims for overpaid VAT, including claims that had already been submitted, would only be met if made within three years of the overpayment.

This instantly cut off the taxpayers’ rights to reclaim overpaid VAT overpaid as far back as 1973. Following the Lords ruling, which found HMRC were wrong to put in place a three-year cap, some estimates say that a surge of new claims are expected to cost the Treasury as much as £1bn in claims and interest, with the charity sector potentially a major beneficiary.

Bill Lewis, taxation consultant at Bates Wells & Braithwaite, confirmed that it is likely HMRC will introduce a short period to enable those affected to make repayment claims.

However, he cautioned: “What we don’t know is how much information HMRC will expect anyone to produce to back up those claims. It is unlikely accurate and detailed records will be held by anyone for 1996 to 1973.

“Charities have an opportunity here to make big repayment claims, which will be substantially boosted by interest. But if HMRC insist on exact records most will be scuppered. Bearing in mind the £1bn sum being bandied around of potential refunds – generally, not just to the sector – the Treasury may insist on HMRC being difficult.”

Lewis said it was an opportunity for the sector, but it was “a bit early to crow about it” until it is known what the HMRC will do.

HMRC has said it is considering its response to the ruling.

Peter Ladanyi, VAT manager at Chantrey Vellacott DFK, agreed that the exact consequences of the judgment were still not completely clear and it awaited further clarification from HMRC, but said charities should be prepared.

“Any claim would have to be prepared and submitted within a narrow window, most likely six months. It therefore would pay to give thought now to whether you might be eligible for a refund of VAT.”

Ladanyi said there were hundreds of areas where the VAT rules have changed since 1973 and claims may be possible, and identified an obvious one for fundraisers. “If you are a charity and incur VAT on your costs of raising donations then you may be able to obtain partial VAT recovery.”

PKF VAT partner Gerry Myton called the ruling “hugely significant”.

“The only issue is whether calculations will be made on a compound basis as that will significantly increase the sums payable. Given HMRC’s attitude to this over the years, charities should be entitled to compound rather than simple interest but it may be necessary to go back to court to get that principle established,” he said. 

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