Tribunal criticizes HMRC’s refusal to allow retrospective VAT group application

The First-tier Tribunal (in Copthorn Holdings Ltd v HMRC) has asked HMRC to reconsider its decision to refuse a taxpayer’s application for retrospective VAT group registration. This is the second time HMRC have been asked to “think again” on their decision.

The taxpayer group is in the housebuilding business. Generally-speaking any VAT incurred by the group on land purchases was fully recoverable, as the group made zero-rated supplies of newly-constructed houses.

However, on certain historic purchases of VAT-opted land a VAT cost had arisen as the group SPV acquiring the relevant property (by way of a sub-sale from the immediate taxpayer purchaser) had not been added to the taxpayer VAT group. As the immediate purchaser had not validly opted to tax the property, a VAT exempt supply had taken place, precluding VAT recovery. Had the relevant SPV been added to the VAT group, such exempt supply would have been disregarded.

It was held that:

• the finance administration function of the taxpayer, at the relevant time, was in a state of “some chaos”. The failure to add the relevant SPVs to the VAT group was not deliberate, but was a genuine error. All subsequent transactions took place on the basis of a (mistaken) assumption that the SPV were part of the VAT group
• the modified HMRC policy on retrospective VAT group applications makes a distinction between taxpayer error (which can seemingly never meet the required “exceptional” circumstance criteria) and HMRC error (which seemingly are “exceptional”)
• HMRC were being far too restrictive in applying the “general” discretion available under section 43B of the Value Added Tax Act 1994. The change to HMRC’s published policy, introduced after an earlier Tribunal decision in the same case that HMRC should reconsider its decision, was a “somewhat cynical endeavour to leave the policy substantially unchanged”
• continued refusal to allow retrospective VAT group registration in this case was not justified on the basis that HMRC had, on four separate occasions, listed for the taxpayer those group companies that were part of the VAT group.

It remains to be seen whether HMRC will now amend its published policy so that retrospective VAT group registration could be possible where the failure arises due to genuine taxpayer error and the effect (of not registering as part of a VAT group) leads to a material net VAT cost for the taxpayer.