The tribunal refuses a claim for interest on overpaid VAT because the overpayment was Parliament’s error, not HMRC’s. Is that right? Writing for Tax Journal as part of his regular column, Victor Cramer explores the answer to this question.

Biscuits, interest entitlements and hire-purchase contracts are VAT’s equivalent of recurring dreams.

HBOS Plc and Lloyds Banking Group v HMRC [2021] UKFTT 0307 (TC)) concerns statutory interest on hire-purchase (HP) bad debt relief claims. The HP contracts in this case were for cars rather than biscuits (no case is perfect). The tribunal found that, for part of the period in which HMRC had enforced unlawful legislation, it had not made an error.



Between 1989 and 1997, UK bad debt relief (BDR) rules required the passing of title to the customer (‘the property condition’) as a precondition to BDR.

In 2006, GMAC UK Plc challenged the lawfulness of the property condition for the 1989–1997 period. Lloyds made similar claims in 2007 and 2009. Following the GMAC decision in 2016 (GMAC UK Plc v HMRC [2016] EWCA Civ 1015), HMRC repaid the Lloyds claims (in 2019) with interest from the date on which the claims were made, i.e. 2007 and 2009.

Lloyds claimed interest from 1989 onwards, being when it would have made claims but for the property condition. Enter litigators, stage right.

Lloyds relied on VATA 1994 ss 78(1)(c), (d) and 85A(2). Section 78(1)(c), (d) require a payment of interest where, due to an error on the part of the Commissioners, a person has:

  • Paid to them by way of VAT an amount that was not VAT due and which they are in consequence liable to repay to him; or
  • Suffered delay in receiving payment of an amount due to him from them in connection with VAT.

It was common ground that s 78(1)(a), (b) did not apply.

Section 85A(2) provides for interest where the tribunal determines that VAT is payable.


Surprising conclusions

The tribunal concluded that HMRC made two errors. The first error was referring to the property condition in its public guidance. The second was rejecting BDR claims until 2019.

The tribunal further concluded that Lloyds did not make BDR claims earlier because it considered that the property condition was lawful and did not wish to be seen as ‘non-compliant’. To put it differently, Lloyds decided to trust in the competence and lawfulness of government actions. The tribunal held this against them.

The conclusions are knit into strange patterns. Although HMRC’s guidance included reference to the property condition, apparently HMRC was merely promulgating Parliament’s error. The proximate cause of the taxpayer’s failure to claim was not HMRC’s promulgation of the error but the error itself. HMRC is not responsible for Parliament’s errors (see para 98).

That is an odd position. Parliament, HMRC and the government are all emanations of the same state. Interest payments compensate the taxpayer. Which part of the state made the error is irrelevant to both the taxpayer and the Treasury.

It should be no defence for HMRC to say that the bigger boys told them to do it. Strip that defence away, and causation for a claim under s 78(1)(d) becomes somewhat irresistible.

As to s 85A, the tribunal could not locate a written notice from HMRC confirming the terms of settlement. Section 85A did not apply. It would be somewhat unsatisfactory if HMRC can avoid liability for interest by not confirming anything in writing.


Looking to the future

The tribunal’s approach is important and reflects the wider stance of the courts. Courts regularly find that once a cause of action becomes identifiable, then no quarter will be given on subsequent delays. Delay is not the taxpayer’s friend.

Expect to see this one again. The Upper Tribunal decision will be full of interest (pun intended).


Victor wrote this article the Tax Journal, click here to view.



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