To give you an idea of how long this stretches back, the initial three-year cap was announced by Kenneth Clarke when he was chancellor in 1996. At the time there were several cases (and rumours) that could have led to significant historical VAT claims which HMC&E (as it was then) sought to limit, no doubt on instruction from the Treasury.

The legality of the cap and the way it was introduced was subject to several challenges. Finally, under claims from Condé Nast and Fleming (an Aston Martin dealership run by a relative of Ian Fleming) HMRC (as it was then) announced in 2008 that the three-year cap had been introduced incorrectly, without a transitional period. HMRC invited new claims or a resubmission of claims previously rejected under the three year cap rules. All claims had to be with HMRC before 1 April 2009 (there were rumours of a substantial claim being one day late). These were referred to as Fleming claims because Condé Nast was tricky to spell.

The taxpayer in this case was a car dealer. This sector made significant claims in numbers and value due to two issues; wrongly accounting for output tax on demonstrator bonuses and declaring VAT on the margin for demonstrator cars when the input tax had been blocked so the sale should have been exempt.

For the original Fleming claims, even with simple rather than compound interest it wasn’t unusual for the interest to be greater than the VAT claim itself. The legal to and fro about whether compound interest was applicable was almost as long but ultimately dismissed.

This case was an attempt to generate further interest payments to the car dealership sector. The first Tier Tribunal broke the claim into three parts:

1. HMRC was in error by requiring VAT payments on demonstrator bonuses.
2. By treating sales of input tax blocked cars as taxable (under the margin scheme) the taxpayer did not think to query the VAT treatment of the demonstrator bonuses.
3. The botched introduction of the three-year cap led to substantial delays in the taxpayer claiming VAT that was rightfully theirs.

The Tribunal dismissed each point as follows:

1. There was no specific ruling from HMRC about the VAT treatment of the demonstrator bonuses and it was open to the taxpayer to apply their own treatment.
2. The Tribunal acknowledged that HMRC’s views on the VAT treatment of demonstrator cars was incorrect, but too remote to be the cause of the overpayment of output tax on demonstrator cars.
3. The taxpayer could not demonstrate that it had a claim identified and quantified but not processed due to the three-year cap rules.

The claim for this one appellant was £200,000. As a lead case for several similar cases the final bill could have been millions. Therefore, this is likely to be appealed to the Upper Tier.

The key points to pick out here are the potentially lengthy period of time for such issues to be decided but that HMRC can (and do) make errors in determining VAT treatments.

Please contact Ian Marrow if you would like to discuss VAT treatment further.