The recent HMRC repayments brief 28/13 outlines a new policy on withholding repayment claims, particularly in suspected avoidance cases. In cases where it is HMRC’s opinion that an avoidance scheme was used, it is their intention to withhold repayments. It is not clear on what legal basis this is to be achieved, especially bearing in mind the outcome of Cotter.
The Cotter decision was enforced in the recent case of Rouse v CRC, in which HMRC sought to enforce the payment of tax debts with immediate effect pending the resolution of enquiries into their claims for loss relief. In the Rouse case a repayment over an undisputed VAT repayment was also withheld from the taxpayer, and set against a disputed income tax liability, while waiting for the resolution of the enquiry with regards to his income tax.
Rouse v CRC
Background and facts:
Rouse had been a VAT-registered, self-employed contractor of plant and machinery since about 1993. He was also a director of a civil engineering company. For the years 2007/08 and 2008/09 he paid tax and National Insurance amounting to £1,049,061 and £998,892 respectively. In 2008/09 Mr Rouse incurred a loss of £1.5 million. He applied to ‘carry back’ the loss and have it offset against the tax due for 2007/08 under ITA 2007, s.132 as part of his 2007/08 tax return.
Mr Rouse had also submitted a VAT return in 2011 which stated that he was owed a repayment of over £600,000.
The Case:
HMRC rejected the claim for loss relief as they argued that the losses were made through avoidance schemes and opened an enquiry under TMA 1970 s.9A into the 2007/08 and 2008/09 tax returns, and refused to give credit for the loss in the meantime.
However, they also withheld the VAT repayment that they accepted was due to Mr Rouse to set against the income tax debt they claimed was due. The central issue in the case was whether HMRC were entitled to set-off a VAT repayment against the disputed income tax.
The Decision:
Upon Rouse’s appeal, the Upper Tribunal were bound by the Court of Appeal decision in CRC v Cotter from 2012 whereby once HMRC had begun an enquiry into a return under TMA 1970, s.9A they could not also enquire under Sch 1A para 5.
Under TMA 1970, s.9A and Cotter there should be no debt on Mr Rouse’s account against which the VAT credit due to him might be set off. The taxpayer’s application for judicial review was therefore granted.
Conclusion
HMRC repayments may become increasingly hard to obtain based on their stated intentions. Fortunately, the cases of Rouse and Cotter prove that the courts and tribunals do continue to provide a mechanism to challenge HMRC decisions that exercise powers disproportionately. However, it is worrying that HMRC persist with such tactics, which they claim prevent the taxpayer from the right to appeal which should rightly be due.