The U.K. Court of Appeal has recently considered the tricky issue of which company can claim a repayment of historic overpaid value-added tax (VAT) where companies have been bought and sold and moved between different VAT groups by the time the repayment can be claimed.
At first sight, you would be forgiven for thinking that this issue had previously been finally determined by the U.K. Supreme Court in 2018 in the Taylor Clark judgment. However, in the latest case of Lloyds Banking Group plc & Others v HMRC & Another  EWCA Civ 485 (the Lloyds case), six appellants joined forces in an attempt to distinguish the Supreme Court’s judgment.
Members of a VAT group appoint one company to be the “representative member.” Any supplies made by a member of the VAT group (the “real world supplier”) are treated as made by the representative member.
If it later becomes apparent that some of the output tax accounted for by the representative member was not lawfully due, and at the time that a claim for a refund from HM Revenue & Customs (HMRC) is made the real world supplier is still a member of the VAT group, the representative member is entitled to bring the claim to recover the overpaid VAT. That is the easy part.
More difficult issues arise where, by the time the repayment can be claimed, the real world supplier has been sold and is a member of a different VAT group. Is it the current representative member of the old VAT group, the real world supplier or the representative member of the new VAT group which can claim the repayment? What happens if the old VAT group does not even exist by that stage?
Although this sounds a bit like an exam question or an interesting academic conundrum, these VAT repayment claims can be extremely valuable, so the answer to these questions is important and the issue should be considered on mergers and acquisitions (M&A) transactions.
The issue has come before the U.K. courts a number of times over recent years. In the Lloyds case, the circumstances of several different appellants were considered at the same time by the Court of Appeal, which involved seven different companies as well as HMRC. Companies involved included Lloyds Banking Group/Standard Chartered plc and Standard Chartered Bank, MG Rover/BMW and Gala.
In most of these cases the real world supplier had been sold and both the representative members of the group that sold it and the representative member of the group that bought it or the real world supplier itself had claimed they were entitled to the VAT repayments. Clearly HMRC would only pay out in respect of each claim to one party.
HMRC’s policy has been to accept the claims of the representative member of the old VAT group and to refuse claims by real world suppliers who have left the VAT group or by the representative member of the new VAT group. HMRC has applied this policy even where the old VAT group has been dissolved by the time the claim is made, treating the correct claimant as the last representative member of the old VAT group before dissolution.
The issue was considered by the Supreme Court in 2018 in a case concerning bingo operator Taylor Clark Leisure. The Supreme Court decided in that case that a repayment claim made by a company which had left the group could not be treated as having been made by the representative member of the group, which was then out of time to make the claim itself.
The Court said that the current representative member of the VAT group of which the real world supplier was a member when the tax was overpaid, was the one entitled to the repayment and had to make the claim. The real world supplier could not make the claim even if it had left the VAT group by the time the repayment claim was made and a claim actually made by the real world supplier could not be regarded as made on behalf of the representative member.
Notwithstanding the Taylor Clark decision, which is binding on the Court of Appeal, the various taxpayers in the Lloyds case argued that the U.K.'s domestic law provisions did not comply with EU law and that this issue was not before the Supreme Court in the Taylor Clark case and was not determined by it.
The taxpayers argued that Article 11 of the EU Principal VAT Directive (the Directive), which allows member states to have VAT groups, does not permit the member state to supplant the rights and obligations of the members of the VAT group by conferring repayment rights only on the representative member. They argued that the repayment rights always belong to the real world supplier whose transactions generate the overpaid VAT, and that when the real world supplier leaves the VAT group, it carries those rights with it and can enforce them.
One of the disputes considered by the Court of Appeal in the Lloyds case related to repayments of VAT accounted for in respect of supplies of services by Chartered Trust plc, now owned by Lloyds Banking Group. In some periods when the supplies triggering the repayments were made, Chartered Trust was itself the representative member of the VAT group; in other periods, Standard Chartered plc was the representative member.
Another dispute covered by this judgment was between MG Rover Group and BMW and related to claims to refunds of VAT paid by the Rover VAT group. The decision also covered a dispute between Gala Leisure and HMRC in respect of claims it had made relating to sales made by real world suppliers who had left different VAT groups which still existed at the time of the claim.
Court of Appeal Decision
The Court of Appeal decided that the representative member of a VAT group remains entitled to recover overpaid VAT, even if the real world supplier has left the VAT group by the time the repayment is claimed.
Declining to refer the case to the Court of Justice of the European Union for a preliminary ruling, Court of Appeal judge, Lady Justice Rose, said that the U.K.'s VAT grouping rules were not precluded by Article 11 of the Directive.
“The proper construction of article 11 does not stipulate that the single taxable person created by the VAT grouping provisions operates in such a way that any [VAT repayment] rights arising from that accounting for VAT are held by the real world suppliers so that those suppliers take the rights with them when they leave the VAT group,” Lady Justice Rose said in her judgment.
The judge stated that where the VAT group has been dissolved, the last representative member of the group is the company which could make a repayment claim, whether or not it is the same legal entity as fulfilled that role at the time of the supplies and whether or not it is still a taxable person. The question of who bore the economic burden of the tax is not a relevant consideration.
The judge also held that in circumstances where the representative member does not bring a claim before the expiry of the limitation period, it does not mean that the principle of effectiveness is breached if no one then has a claim against HMRC.
The Court of Appeal did, though, reiterate that there may be exceptional circumstances in which the operation of the VAT group provisions and the VAT repayment provisions in sections 80 and 80A of the Value Added Tax Act 1994 do not provide an adequate framework for the full enforcement of rights to recover tax levied contrary to EU law. One example of this would be where the VAT group and representative member have been dissolved.
However, the appellants in the Lloyds case were unable to establish that any exceptional circumstances existed in their cases.
On M&A transactions, the parties should identify whether there are any outstanding VAT repayment claims or claims that could be made in the future in respect of VAT paid before completion. If there are, the parties need to decide who will get the benefit of the claims.
If it is decided that the benefit should stay with the real world supplier and so effectively pass to the buyer, the share purchase documentation needs to include drafting to enable the buyer to get the benefit of any VAT reclaims received. The contracts will also need to give the buyer rights in respect of the conduct of the claim against HMRC for the repayment.
As there has been uncertainty for a number of years over which company can claim VAT repayments, there will be a number of situations where the parties considered the issue on share sales and purported to assign the benefit of the claim. These should now be revisited in light of this decision.
Clara Boyd is a Partner with Pinsent Masons.
The author may be contacted at: firstname.lastname@example.org