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HMRC internal manual

VAT Retail schemes guidance

Fundamentals of the retail schemes: Binding agreements

An agreement, either express or implied, to operate a retail scheme in a particular way can amount to a legally binding agreement.

The problems this can cause were highlighted by two cases in which the assurance team considered that the retail scheme needed to be adjusted to produce a fair and reasonable result. The business did not challenge that judgement and was prepared to make the calculation from a current date. However, in each case the business resisted a retrospective assessment on the grounds that there had been an agreement to make the scheme calculation without the officer’s adjustment. In consequence, the business argued, the Commissioners could not unilaterally resile from that agreement and there was no right to assess for past periods.

This contention was right. It has been established law since the Court of Appeal decision in GUS Merchandise Corporation Ltd (No 2) [CA October 1994 [1995] STC 27, and the decision of the VAT and Duties Tribunal in Tesco plc [LON/93/1954], that the Commissioners can enter binding agreements and that they cannot unilaterally resile from those agreements with retrospective effect.

There are three particular points to bear in mind.

  • A binding agreement need not be in writing. An agreement to use a scheme in a particular way can be implied by the Commissioners’ words and actions; it is not possible to list all the ways in which this might happen, but whenever you acquiesce in a retailer departing from a published method, it is possible that a binding agreement might be inferred by the courts.
  • If an agreement exists, then any termination of that agreement must be done in an unambiguous way and must be from a current date.
  • Where the amount of tax in a business’s system is governed directly by legislation (such as liability or the right to deduct), then cyclical control will always give the opportunity to assess past periods within the normal time limits for assessment. But where the tax at risk is regulated by agreements (such as retail schemes or partial exemption) we will be able to assess retrospectively only in the most exceptional cases.

Cases of difficulty should be discussed with the appropriate HO. In cases of doubt, or where you feel that there is a need to do so, you should refer the case for further advice, following the instructions on the Indirect Tax Homepage.