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HMRC internal manual

VAT Refunds

Late claims for input tax: Definition of a claim: Abusive claims

There is a good deal of case law of the European Court of Justice 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 taxable rather than exempt, a trader makes a claim for the input tax that he didn’t deduct on the assumption that his supplies were exempt but doesn’t declare the output tax that he would have been liable for.

The rationale for the claim is that the claimant has a directly effective Community law right to deduct the input tax and that HMRC will not normally assess to recover the output tax where the failure to account for it was the result of ‘departmental error’.

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