An interesting VAT case has been decided at the Supreme Court (SC) concluding on two matters, whether HMRC had raised an assessment in time and whether HMRC had the right to withhold repayment of a VAT credit.

The holding company of the high street opticians Optical Express, DCM (Optical Holdings) Limited (DCM), made both taxable and exempt of VAT supplies in its stores.  The provision of dispensing services being exempt but the supply of frames and lenses being taxable.  Where this happens, the trader is considered partially exempt and can only reclaim a portion of the VAT it incurs on supplies it receives, such as VAT on the rent of the stores.  Generally, any non-attributable input VAT is apportioned by reference to the portion of taxable and exempt sales to total sales, though other special methods of apportionment can be agreed with HMRC.

HRMC raised an assessment against DCM in October 2005 relating to a period ending July 2003.  The 1994 VAT Act states that HMRC have until the later of a) two years after the end of the prescribed accounting period or b) one year after evidence of facts come to HMRC’s knowledge.  As the assessments were raised more that two years after the end of the relevant accounting period the date when HMRC had sufficient evidence to raise an assessment became the date in question.  DCM argued that HMRC could have deduced from an earlier date and HMRC contended that they only had actual evidence from a later date.

The SC sided with HMRC confirming that the one-year time period started by reference to ‘actual’ knowledge and not ‘constructive’ knowledge.  Therefore, HMRC had raised the assessment in time and DCM were due to pay it.

Regarding the duty to repay VAT credits to traders, the SC also sided with HMRC stating that HMRC have a duty to check VAT repayments before paying the credits out to traders.  This duty to check the validity of VAT reclaims was implied and HMRC act in a fiscally neutral manner by withholding repayment of VAT credits until they have sufficient evidence to verify the credit.

The decision can be found at: DCM (Optical Holdings) Ltd (Appellant) v Commissioners for His Majesty’s Revenue and Customs (Respondent) (Scotland) – The Supreme Court

VAT can be a particularly complex tax, especially where traders are providing both taxable and exempt supplies.  We are experienced with both advising partially exempt traders and negotiating matters with HMRC.  Please do contact if you have received an assessment of HMRC or need assistance and advice on VAT matters.