A bingo club operator has lost an appeal to the UK Supreme Court over an attempt to reclaim VAT paid in years prior to a change by HMRC in its method of calculation.
Five Justices unanimously agreed with the Inner House of the Court of Session that an adjustment by K E Entertainments Ltd in a return in January 2013 covering the years 1996-2004, following a change in practice by HMRC in 2007, related to a "mistake" which could be corrected by a claim under s 80 of the Value Added Tax Act 1994, but only up to three years after the overpayment took place.
Prior to 2007, HMRC charged VAT on a game by game basis. From 2007 onwards, HMRC changed its method of VAT calculation and charged VAT on a session by session instead of a game by game basis, an approach more favourable to the appellant. The notice advising of the change invited bingo operators to make claims for repayments of overpaid VAT paid as a result of using the previously stated methodology.
The appellant attempted to make an adjustment of output tax in the sum of £435,630.40 in respect of the years 1996-2004 in its return for the period to December 2012, following a tribunal decision in another case allowing an adjustment without limitation of time. It argued that it was required to make this adjustment by virtue of reg 38 of the VAT Regulations 1995. HMRC considered that there was no change in consideration and, rather, that by following the guidance in its earlier notices, the appellant had made a mistake in the earlier periods which it could correct by a claim under s 80.
The First-tier Tribunal and Upper Tribunal found for the appellant, but the Inner House allowed HMRC's appeal.
Lord Leggatt, with whom Lords Reed, Hodge, Lloyd-Jones and Sales agreed, said that to avoid the time limit in s 80, which applied to recovery of money paid that was not "VAT due to HMRC", the appellant had to argue that the relevant tax paid in the years in question was due to HMRC. The appellant argued that both the session by session and the game by game methods of calculation were legitimate methods, therefore it was paying tax that was due.
Lord Leggatt disagreed. There was only one correct method of calculating the taxable element. In the present case, it was an agreed fact that a customer purchased a right to participate in a session of bingo. No reason was advanced for going behind the appellant's pricing policy. It followed that if, as a result of using the game by game basis, the taxpayer had paid more VAT to HMRC between 1996 and 2007 than if it had used the session by session method, the taxpayer had paid tax that was not due. This meant that s 80 with its three year time limit applied, so that VAT paid before 2004 could not be recovered.
That was sufficient to dispose of the appeal, but Lord Leggatt also rejected a further argument relying on article 90 of the Principal VAT Directive and related regulations, as these applied only where there had been a change in the consideration actually received by the taxpayer, not where all that had changed was the method used to calculate the taxable amount. It would subvert s 80 of the VAT Act if the taxable person could, by adopting a different method of calculation, adjust its liability for all past years.
Nor could the appellant rely on an invitation in a "business brief" issued by HMRC, as this merely expressed HMRC's view of the law and in any case could only reasonably be read as inviting claims under s 80.
Lord Leggatt noted that 14 similar cases were pending, with a total value between £30m and £40m.