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Billions claimed by businesses caught in VAT error

HM Revenue & Customs (HMRC) has set aside nearly £5 billion to deal with potential claims resulting from making a mistake about not telling taxpayers that they had a right to reclaim overpaid VAT.

The debt provision follows a legal decision last year that found a time limit of three years for reclaiming overpaid VAT did not apply because the announcement was not made widely to all taxpayers in line with European Union law. HMRC said an “unprecedented” number of claims were received from about 13,000 businesses that believed they had overpaid tax as a result of the ruling denying them a chance to reclaim overpaid tax.

 “I don’t think we have had a similar case before. It is a rather unusual situation,” said an HMRC spokesman

Full details about the claims, that are much larger than initial estimates, were revealed in a National Audit Office report showing HMRC had set aside £7.2 billion as “provision for liabilities arising from legal claims by taxpayers”. 

HMRC confirmed that most of the money – £4.8 billion – related to claims from businesses following the January 2008 legal victory by Aston Martin dealer Michael Fleming. 

About £1.5 billion has already been paid because of the Fleming precedent. 

Law lords ruled Fleming and Conde Nast were entitled to a refund of any overpaid VAT in the 24 years between 1973 and 1997. 

They ruled HMRC had acted illegally when in 1997 it suddenly said people had only three years to claim for any overpayment. 

Any companies that were denied a claim under HMRC’s three-year rule can now take the claim back as a result of the ruling.

The expected payout contributed to HMRC’s net revenues diving by nearly £32 billion in 2008-09 compared with the previous year. 

A £21.7 billion drop in the tax received, that was slightly worse than Treasury forecasts, as well as £2.7 billion owed to the taxpayer and the new £7.2 billion set aside for liabilities led to a total fall of £31.6 billion.


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