In this post, Neal Chandru, an Associate in the Tax team at CMS, comments on the case of DCM (Optical Holdings) Ltd (“DCM”) v Commissioners for his Majesty’s Revenue and Customs (“HMRC”)  UKSC 26 – handed down on 12 October 2022.
The issues on appeal before the Supreme Court were whether HMRC:
- were, on the facts of the case, constrained by the statutory time bar in s 73(6) of the Value Added Tax Act 1994 (“VATA”); and
- can deny a self-assessment claim for payment of a VAT credit while HMRC validates the claim.
The background facts which gave rise to these issues are set out in more detail in the UKSC Blog post previewing this decision. For present purposes, the background facts can be summarized as follows.
DCM is an optician that makes supplies of medical services taxable and exempt. In 2003, DCM entered into a settlement agreement with HMRC under which it agreed that 64 per cent of its supplies were exempt and the remainder taxable. In early 2004, HMRC told DCM that it had to use a full cost apportionment methodology of apportioning the consideration paid by customers between taxable and exempt supplies until a different separately disclosed charges methodology could be agreed with HMRC.
In the relevant periods, contrary to the settlement agreement, DCM treated 70 per cent of its supplies as exempt and the remainder as taxable. It also failed to use the full cost apportionment methodology HMRC said it needed to use.
The First Issue
VATA, s 73(6)(b) provides that:
“An assessment under subsection (1), (2) or (3) above of an amount of VAT due for any prescribed accounting period must be made within the time limits provided for in section 77 and shall not be made after the later of the following –
one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge”
DCM argued that HMRC knew from 29 January 2004 that DCM had not been using a full cost apportionment methodology to calculate the split between exempt and taxable supplies and that it was not adopting a 36:64 split between taxable and exempt supplies. Accordingly, pursuant to VATA, s 73(6)(b), 29 January 2005 was the last date on which HMRC’s assessments could be raised. As the assessments were raised on 20 October 2005, DCM argued that they were made out of time.
The Second Issue
In relation to the second issue, DCM argued that HMRC is required to pay a taxpayer VAT credits claimed by the taxpayer without first validating the claim; and HMRC has no power to pay an amount less than what the taxpayer claims in its self-assessment.
DCM argued that these requirements are grounded in VATA, s 25(3), which provides:
“If either no output tax is due at the end of the period, or the amount of the credit exceeds that of the output tax then … the amount of the credit or, as the case may be, the amount of the excess shall be paid to the taxable person by the Commissioners; and an amount which is due under this subsection is referred to in this Act as a ‘VAT credit’.”
Conclusions on the Issues
The First Issue
The Supreme Court stated that VATA, s 73(6)(b), refers to the assessment that HMRC has actually made rather than a hypothetical assessment. This follows from the words “the assessment” in the subsection:
“one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment”
In the Supreme Court’s view, HMRC did not have sufficient evidence to make the 20 October 2005 assessment until it gained access for the first time to DCM’s VAT account during a visit to DCM’s premises on 31 August and 1 September 2005. Accordingly, the 20 October 2005 assessment was not out of time.
The Second Issue
The Supreme Court acknowledged that HMRC does not have an express power to refuse to pay a VAT credit to a taxpayer while it verifies the claim for that credit. However, the Supreme Court held that this power arose by implication. The Supreme Court’s reasons for finding this implication included the following.
First, the obligation in VATA, s 25(3) for HMRC to pay a VAT credit only arises once it is established that a VAT credit is in fact due. On that basis, the obligation on HMRC to pay the credit does not inevitably follow from the taxpayer’s claim for a credit.
Second, under VATA, Sch 11, para 1, HMRC are under a statutory duty “for the collection and management of VAT”. It is implicit from this duty that HMRC has the power to refuse to pay a taxpayer a VAT credit not due to it.
Third, on the basis of fiscal neutrality, HMRC is tasked with verifying a taxpayer’s repayment claim. Otherwise, taxpayers who regularly claim VAT credits from HMRC would have an unjustified cash flow advantage compared to taxpayers who pay a net sum to HMRC.
The Supreme Court’s decision in DCM importantly establishes that:
- the time bar in VATA, s 73(6)(b), does not begin to run until HMRC has the last piece of evidence that justifies the making of the assessment that HMRC actually makes; and
- HMRC has an implied statutory power to refuse to pay a VAT credit to a taxpayer.
DCM represents a victory for HMRC. However, the conclusions on the first and second issues need not cause taxpayers excessive concern. The Supreme Court’s construction of VATA, s 73(6)(b), does not allow HMRC to raise assessments excessively out of time as VATA, s 77, prohibits the making of assessments for the relevant accounting period after a particular period of years. The period of years is currently four.
In relation to the second issue, it must be said that DCM’s argument here was ambitious. It is difficult to see how the VAT regime could work if HMRC were obliged to pay VAT credits to a taxpayer simply because they are claimed to be entitled to the credit. On that basis, it is unsurprising that DCM did not succeed on this issue.