A landmark legal case in the Administrative Court has led to a change of tack by Her Majesty’s Revenue & Customs in the way it handles VAT overpayments arising out of insolvency. The recent judicial review of the case has held that HMRC can refuse to pay a tax refund of overpaid VAT to a supplier.

The case arose following the company insolvency of a supplier which had overcharged a customer VAT. Given the supplier’s insolvency, it became impossible or excessively difficult for the customer to obtain a refund directly from the supplier.

Before this significant ruling for insolvency practitioners was made, the refund payments would have been added to the general pot made available to the creditors of the insolvent company. However, the decision not to refund the supplier represents a policy change for HMRC when dealing with similar cases in the future.

Details of the case

Premier Foods Limited was a VAT registered company and a customer of Q Cold Limited (QCL). In one transaction, QCL mistakenly invoiced Premier Foods for just under £4million of VAT on goods that should have been zero rated.

In the normal course of business, Premier Foods could not reclaim the overpaid VAT directly from HMRC, but instead would have to wait for QCL to reclaim the payment on their behalf. QCL would then make the payment to Premier Foods.

In a cruel twist of fate for Premier Foods, QCL entered into administration shortly after submitting the claim for the VAT refund to be made. If HMRC had made the £4million payment to QCL, the money would have been put into a central pot to be used to satisfy all the creditors’ claims arising from the administration, with Premier Foods just one of many non-preferential and unsecured creditors.

Another problem was that Premier Foods had offset the VAT on the incorrect payment against the VAT on its own sales. This meant that the company would have had to account to HMRC for the £4million overpayment under various assessments; and, in all reality, as an unsecured creditor of QCL, it was only likely to receive a minimal dividend from the administration of QCL.

The ruling

The decision was made that because it was impossible or excessively difficult for Premier Foods to reclaim the money it was owed from QCL directly, the customer could make a claim for the overpaid VAT against HMRC directly. The court held that HMRC had grounds on which to decline QCL’s claim for the VAT payment, and instead make the refund to Premier Foods. The court also ruled that all the assessments raised against Premier Foods should be scrapped.

What does this decision mean for UK businesses?

This ruling will come as an obvious relief for any businesses that have made a VAT overpayment, only for their supplier to enter into a company insolvency before the money can be reclaimed. There will also be further relief for companies which face claims from HMRC after choosing to offset this overpayment against VAT on goods they have sold.

Customers who receive assessments from HMRC after overstating the VAT on purchases it has made should immediately check the solvency of their supplier. If there are any doubts about the supplier’s solvency, the customer should make a claim to HMRC for the refund to be paid to them directly.

Of course, the decision will not come as welcome news for the directors and owners of limited companies that become insolvent, or the creditors who make claims against the insolvent company who will not benefit from any VAT refund payments made by HMRC.

There is still some uncertainty as to the fate of customers of insolvent suppliers who are private individuals, rather than VAT registered companies. From this decision, it seems unlikely that any refund will be paid to an insolvent supplier. Instead, any creditors with a claim that includes an element of VAT overpayment should contact HMRC directly. Customers must make any such claims within three years of the loss arising.

If you need help fast with HMRC action being taken against your company call me or any my team on 08000 746 757.

Written by: Mike Smith