The rules relating to VAT present many pitfalls and specialist advice should always be taken if there is any doubt over the VAT treatment of any significant transaction or series of transactions.
In one striking case, the High Court had to come to the aid of a company which mistakenly paid almost £4 million in VAT to a supplier before the latter went into administration.
Over a period of more than four years, the supplier had added VAT to its invoices although the goods concerned should have been zero-rated.
The company had paid the bills without demur and did not realise its mistake until after the supplier went into administration.
In such circumstances, a company has no statutory right to reclaim the VAT it has paid by mistake from HM Revenue and Customs (HMRC). Strictly, its legal right to recover the incorrectly charged VAT is against the supplier who charged it.
HMRC accepted that the VAT had been paid in error, but proposed to make the repayment directly to the supplier.
The company's problem was that it was unlikely to be able to recoup the sum it was owed from the supplier, as the insolvent company's refund from HMRC was likely to be used by the administrators for distribution amongst its creditors.
HMRC had also raised assessments against the company in respect of input tax which it had deducted from its VAT payments, because it had claimed a deduction for the input VAT it had been improperly charged.
It therefore faced the disastrous prospect of having to pay a VAT assessment for the total of the deductions it had made with regard to the incorrect payments, without this being offset by the receipt of a refund from the insolvent company's administrators.
In overturning those assessments, the Court accepted arguments that the course proposed by HMRC would breach European law principles of fiscal neutrality and would inflict serious financial hardship on the company.
The Court also declared that repayment of the money to the supplier would amount to unjust enrichment of the same, or its creditors.
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