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HMRC internal manual

VAT Refunds

Claims for overdeclared output tax: Definition of a claim: Abusive claims

There is a good deal of case law of the European Court of Justice (EJC) holding that:

“It is … settled case-law that Community law cannot be relied on for abusive or fraudulent ends - see, Case C-32/03 Fini H [2005] ECR I-1599, paragraph 32, and Case C-255/02 Halifax and Others [2006] ECR I-1609, paragraph 68.”

This approach has been adopted by the House of Lords in Pirelli Cable Holding NV -v- IRC & other appeals, [2006] UKHL 4; [2006] STC 548.

On the one hand, a Member State may not rely on its failure to implement a provision of EU law. On the other, businesses and individuals who seek to rely on the direct effect of an EU provision cannot “cherry pick” in order to produce an advantageous result.

If a person relies on the direct effect of an EU provision, that provision must be given its full effect. A claim which relies on only one part of a provision to the unjustified advantage of the claimant may well be abusive.

The term ‘abusive claim’ as used here means that the claimant has sought to use EU legislation or the case law of the ECJ (or UK legislation and case law intended to implement the EU provisions) in order to obtain a result which is contrary to the intentions of the EU legislator and contrary to the intention of the ECJ. That result is an unjustified tax advantage.

A simple example of such a claim might be where, after a judgment that supplies of X are exempt rather than taxable, a trader makes a claim for the output tax that he overdeclared on his supplies of X but doesn’t declare the input tax that he deducted wrongly on the understanding that his supplies were taxable.

The rationale behind the claim is that the claimant has a Community law right to recover the overdeclared output tax and that HMRC are not entitled to recover the input tax because they cannot rely on their failure to implement Community law properly.

Such claims should be brought to the attention of the Anti-Avoidance Group.