Birmingham Hippodrome Theatre Trust Ltd v Revenue And Customs

Where a taxpayer invokes a directly effective VAT exemption, it must be placed in the position it would have occupied had the directive been implemented fully and correctly. The exemption from output tax and the consequential loss of input-tax deduction form an inseparable whole.

Accordingly, VAT Act 1994 section 81(3A) permits HMRC, when determining a repayment claim arising from a mistake, to set off all credits and debits resulting from that same mistake. The provision does not require a direct link between particular input and output transactions or accounting periods. This construction is compatible with effectiveness, equality and legal certainty, since the taxpayer elects to make the claim and cannot be made liable for a further payment by the set-off.

The Trust, a charity operating a theatre, had accounted for VAT on ticket sales which should have been exempt under Article 13A(1)(n) of the Sixth Directive. It sought repayment of output tax paid between 1990 and 1996.

During a refurbishment closure in 2000 and 2001, the Trust had received input-tax repayments which it would not have been entitled to had its ticket supplies been treated as exempt. HMRC was time-barred from recovering those repayments by a free-standing assessment, but relied on section 81(3A) of the VAT Act 1994 to set them off against the Trust's claim.

The First-tier Tribunal and Upper Tribunal upheld HMRC's set-off. The central issue on appeal was whether section 81(3A) permitted that result consistently with EU law.

1. Appeal dismissed. The Upper Tribunal correctly held that HMRC could set off the wrongly repaid input tax against the Trust's claim for repayment of wrongly paid output tax. No reference to the CJEU was necessary.

2. A directly effective right under Article 13A(1)(n) of the Sixth Directive entitled the Trust to the position it would have held if the United Kingdom had implemented the exemption correctly and on time. That position included both exemption from output tax and loss of the right to deduct input tax. The two consequences were an inseparable whole. A taxpayer could not obtain the benefit of the exemption only for accounting periods selected to produce a favourable result.

3. Section 81(3A) of the VAT Act 1994 was to be construed, consistently with that EU right, as requiring account to be taken of all consequences of the same mistake. The provision covers amounts payable to and by the taxpayer. It permits HMRC to bring into the set-off both credits and debits arising from the mistaken treatment of the ticket supplies, without a direct and immediate link between particular inputs and outputs or a restriction to particular accounting periods.

4. The statutory process was not an out-of-time free-standing recovery by HMRC. It operated only if the taxpayer made a repayment claim. The taxpayer chose whether to claim and, subject to limitation rules, which periods to include. Moreover, the set-off discharged HMRC's repayment obligation only; it could not create a further VAT liability. Those features meant that effectiveness, equality and legal certainty did not prevent the construction adopted.

5. The court disagreed with the Upper Tribunal's proposed rule that the legal burden of proof shifted because records were no longer required to be retained. In a tax appeal the legal burden remained on the taxpayer, although HMRC would bear an evidential burden in advancing a set-off. That error did not affect the outcome on the agreed facts.

1. Court of Appeal (Civil Division) — dismissed the Trust's appeal and upheld HMRC's entitlement to set off under section 81(3A): [2014] EWCA Civ 684.
2. Upper Tribunal (Tax and Chancery Chamber) — upheld HMRC's set-off, subject to a burden-of-proof qualification which the Court of Appeal rejected as not affecting the result: [2013] UKUT 057 (TCC); [2013] STC 1079.
3. First-tier Tribunal — held that HMRC was entitled to the set-off: [2011] UKFTT 117 (TC); [2011] SFTD 473.