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HMRC internal manual

VAT Business/Non-Business Manual

Legal history: cases about retrospective changes of method

Please note that the following material is not a full summary of the case - it merely highlights the principle referred to in the appropriate section of this manual.

Victoria and Albert Museum Trustees 1996 STC 1016

HMRC refused to agree a change of method retrospectively. From 1 April 1990 to 31 March 1993 the museum used an income-based method of apportionment. At that time the museum had a manual system of accounting that could not cope with direct attribution of tax incurred to business or non-business.

Such a system was eventually developed and adopted with effect from 1 April 1993. The museum applied the method retrospectively to 1 April 1990. It lodged a voluntary disclosure which HMRC rejected.

The tribunal found that although the income based method was less favourable to the museum than the direct attribution method, it was a fair and reasonable method in the circumstances prevailing at the time it was used.

Therefore the museum had not made an error within the meaning of Regulation 64 of the VAT (General) Regulations (now Regulation 34). As a result it was not entitled to retrospectively adjust its input tax claim.

When it upheld the tribunal’s decision to dismiss the appeal the High Court commented that: “The problem which, as it seems to me, the Museum is unable to surmount is in demonstrating of what the error consisted, that is of fact, law or otherwise … there was no error of law. No error of fact is asserted other than that a method of assessment was chosen (please note that the judge is here referring to the Museum’s chosen method of apportionment) which did not provide the most favourable outcome. It was nevertheless not one which involved an intrinsic error of fact or law.”