VAT Tribunal decision in the case of Paymex Limited v HMRC

Following on from the abovementioned business brief, HMRC wish to offer further clarification on the following points which may be of interest or concern to the insolvency profession.

• Although the Tribunal decision itself applied purely to consumer IVAs, HMRC consider that the terms of the Tribunal decision read across to all IVAs.  The important point for IPs to consider here is not the specific type of IVA but rather whether the nature of the services they provide are covered by the terms of the Paymex Limited ruling.
• Although HMRC does not consider the terms of the Tribunal decision to be restricted to a particular type of IVA, the Tribunal decision does not deal with company voluntary arrangements (CVAs) or partnership voluntary arrangements (PVAs). If IPs consider, on the basis of the Paymex Limited ruling, that they have overpaid VAT arising from their role as supervisors of CVAs or PVAs and seek to reclaim such VAT, these claims will be rejected.
• The effect of the Tribunal ruling is that IPs may have overpaid VAT where their services in an IVA are covered by the terms of the ruling.  IPs affected are therefore entitled, but not obliged, to claim a refund of wrongly declared output VAT, under Section 80 of the VAT Act 1994.  However, IPs may also have reclaimed input VAT in such cases to which, following the Tribunal ruling, they may not have been entitled.  Refunds will only be issued for the balance of output VAT wrongly declared on the services in question less any input VAT wrongly deducted on the assumption that the supplies to which it was attributable were taxable.
• The input tax that will be deducted for the amount claimed will be both that input tax that was directly attributable to the supplies of services in question and, if the IP was already partially exempt, the appropriate percentage of the overhead or residual input VAT.
• Public Notice VAT 700/45, ‘How to correct VAT errors and make adjustments or claims’ explains how to go about claiming a refund in this circumstance.
• If the IP was fully taxable for the period covered by the claim then making a claim for a refund of wrongly declared output VAT will have the effect of making him partially exempt for the period of the claim.  In that event, he will have to calculate the percentage of overhead or residual input VAT that should have been blocked.
• Although input tax must be taken account of by IPs when claiming refunds of overdeclared VAT as above, HMRC will not seek to recover input tax previously overclaimed in the light of this ruling in any cases other than those in which a claim for a refund of overdeclared VAT is made.  If the IP chooses not to ‘disturb the past’, HMRC will not disturb it either.  It is entirely a matter for the IP whether to claim a refund under Section 80 of the VAT Act or not.  Nothing in VAT legislation obliges him to do so.
• Claims for a refund of overdeclared VAT are subject to normal capping rules.  Claims for repayment will therefore not be considered for periods ending more than four years before the date on which the claim is made.
• HMRC can reject claims where they are able to show that the claimant would be unjustly enriched by payment of his claim.
• If an IP decides to claim a refund under Section 80 of the VAT Act and reimburse his customers under Section 80A and Regulations 43A TO 43G of the VAT Regulation 1995, he must reimburse the total amount paid to him by HMRC in cash or by cheque.  He is not entitled to deduct any amount by way of administration fee etc.  This is expressly stipulated in Regulation 43C(b) of the VAT Regulations 1995, which states that ‘no deduction will be made from the relevant amount by way of fee or charge (howsoever expressed or effected)’.
• Once the refund is paid into the IVA estate in its entirety, the refund then becomes an asset of the estate.  Any subsequent question of IP’s costs will be determined by the terms of the actual arrangement in accordance with insolvency legislation.
• Any claim made under Section 80 of the VAT Act 1994.  It must set out the basis of the error and the amount being claimed and show how that amount has been calculated.  The claimant must be able to provide copies of the documentation used in the calculation of the claim on request.  An ‘estimated’ claim, or a declared intention to lodge a claim at a future date, will not stop the clock running on the four year cap.
• In cases where the debtor was registered for VAT, the debtor will already have reclaimed input VAT at the time on the supplies on which output VAT was incorrectly charged.  Therefore, claims for refund of incorrectly charged output VAT under Section 80 of the VAT Act must be restricted to those cases in which the debtor was not registered for VAT at the time of the supplies in question.
• Where IPs intend to declare additional dividends to creditors in IVAs from money refunded by HMRC, HMRC’s Voluntary Arrangements Service is happy to accept one collated payment covering all of the IVAs concerned if possible, provided the IP can still identify the proportion of that dividend for individual IVAs.

HMRC hopes the above information assists the insolvency profession by further clarifying HMRC’s view of the impact of the Tribunal ruling in this case.  IPs may request further advice on the correct VAT treatment in individual cases by contacting the VAT Helpline on Tel 0845 010 9000.