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HMRC internal manual

VAT Refunds Manual

What to do with claims during litigation

You should be particularly careful to

  • treat claims received in the course of litigation correctly, and
  • protect HMRC’s position to make sure we can recover any payment should a later decision be in our favour, or
  • withhold payment where there are grounds to think our protective measures are not enough to ensure any subsequent recovery that may be needed.

Claims in the course of litigation – Decisions against us

Where a decision goes against HMRC in a liability dispute, we will often get claims for over-declared output tax or under-claimed input tax based on that judgment from on-lookers who

  • made claims at the same time as the main litigant and whose appeals are stayed behind that main litigant (followers), and
  • only made claims when the decision against us was released (non-litigants).

Where the decision is from the First-tier Tribunal, we will not normally invite claims and you should not pay them unless the relevant policy team tells you to do so. Instead you should reject the claim and invite the claimant to appeal.

However, where the claim is based on a judgment of the Upper Tribunal, the High Court or the Court of Appeal (England and Wales and Northern Ireland) or the Court of Session (Scotland) we are bound to pay the claim even if we do not agree with the judgment and have appealed against it. You should

  • verify a claim in the normal way,
  • only process the claim after the relevant policy team has issued guidance (whether public or internal) explaining how the judgment is to be applied, and
  • pay, with statutory interest if appropriate.

Where we have applied for, or been given, leave to appeal, we have to protect ourselves against the possibility that the judgment might be overturned. To do this, you must make protective recovery assessments when the claim and any associated interest are paid.

An assessment should be made under either section 73(2) (input tax) or 80(4A) (output tax) of the VAT Act 1994 as appropriate for the amount paid on the claim and another one should be made under section 78A of the Act for any statutory interest that was paid.

Please see VAEC5500.

Claims in the course of litigation – Decisions for us

Even decisions in our favour on a liability point can generate claims by on-lookers.

You should reject all such claims and invite claimants to appeal to the First-tier Tribunal under section 83(1)(c) or (t) as appropriate.  Such claims must not be stockpiled or held undecided on file pending the outcome of the litigation.

Where the claim is made on the basis of an interpretation of law that is being litigated, you should have the appeal stood over behind whichever appeal is in the lead, with the agreement of the taxpayer if possible.

Where the claim is made at a time when the point at issue is not being litigated, you should consult the relevant policy team and, subject to their advice, reject the claim. The claimant can then decide whether to appeal HMRC’s decision in the Tribunal.

Claims in the course of litigation – Withholding of payment of claims

Normally, where there is an authoritative judgment against HMRC, we will pay claims and make protective recovery assessments which will only be enforced in the event that the judgment which caused us to pay the claims is subsequently overturned.

However, there may be cases where you should consider withholding payment on the grounds that the protective recovery assessment does not afford us sufficient protection. 

Accepting that there is always a possibility that a claimant’s business might fold between the time when a claim is paid and the time when we come to enforce the protective assessment, if, when you are preparing to authorise payment of the claim, there are reasonable grounds for concluding that the claimant will not be able to repay the claim a few years down the line, you should consider withholding payment of the claim until such time as the litigation is finally determined against us, if it is.

That might be the case where, for example:

  • The claimant’s business is insolvent, in liquidation, in administration;
  • There are signs of incipient insolvency in the claimant’s business;
  • The claimant has ceased trading and has no apparent income or assets or insufficient income or assets to cover the amount of any recovery assessment;
  • The claimant is a shell or dormant company with no apparent income or assets or insufficient income or assets to cover the amount of any recovery assessment; or
  • The value of the claim is greater than the value of the business itself.

If such a claimant is impatient for repayment of his claim, it may be worth carrying out further investigation to explain that impatience.

The fact that the claimant is no longer trading is not, of itself, a reason to withhold payment. A stay should only be sought if the claimant appears not to have the means to meet any repayment order we might seek.

Nor is the fact that the claimant’s VAT registration is redundant necessarily a reason to withhold. He may still be trading below the registration threshold or the claimant may be a company which deregistered to join a VAT group. In either scenario, it is entirely possible that the claimant will still be good for the ‘debt’ should it become enforceable.

If you are satisfied that there are sufficient grounds for withholding payment of the claim, payment should only be made on provision of some form of security (such as a bank guarantee or a performance bond) by the claimant.

A decision to withhold payment is not a decision in respect of which there is a right of appeal under section 83 of the VAT Act.