The Rank Group PLC v The Commissioners for HMRC

Under Value Added Tax Act 1994, section 80(1) creates a credit for the gross amount of output tax wrongly accounted for. Section 80(2A) does not itself authorise a set-off. Set-off instead operates under section 81(3), as extended by section 81(3A).

Where section 81(3A) permits HMRC to disregard time limits because of a common mistake, it must take account of all consequences of that mistake. It may not apply an asymmetric, prescribed-accounting-period set-off that takes account only of amounts due to HMRC.

However, an underpayment by HMRC of an amount due under a section 80(1) claim is an unpaid debt. It is not a payment by the taxpayer to HMRC. It therefore cannot found a repayment claim under section 80(1B).

Rank had accounted for VAT on bingo supplies which, following a decision of the Court of Justice of the European Union, should have been exempt. HMRC paid three timely claims under section 80(1) of the Value Added Tax Act 1994, but reduced them for associated input tax. A fourth claim, covering earlier periods, was time-barred.

Rank contended that, when applying the section 81(3A) set-off to the three paid claims, HMRC should also have credited its net overpayment in the time-barred periods. It claimed £67.05m under section 80(1B), asserting that HMRC's failure to do so amounted to a payment of VAT not due.

The First-tier Tribunal dismissed the appeal. It held that set-off was not a payment for section 80(1B). Rank appealed to the Upper Tribunal, which considered both the calculation of the earlier claims and whether an HMRC underpayment could constitute a statutory payment by Rank.

1. Appeal dismissed. The Upper Tribunal held that HMRC had miscalculated the payments due on Rank's three successful section 80(1) claims, but Rank had not made a payment capable of supporting a claim under section 80(1B).

2. Section 80(1) creates a credit equal to output tax wrongly brought into account. There was no textual basis for implying into sections 80(1) or 80(2A) an internal set-off for associated input tax. Section 80(2A) makes the net credit payable only after sums have been set against it under another provision of the Value Added Tax Act 1994.

3. Sections 81(3) and 81(3A) supplied that mechanism. Section 81(3A) is a special provision directed to undoing all consequences of the same mistake. When HMRC disregards time limits to set off a taxpayer's out-of-time liability, it must also take account of the taxpayer's related overpayments. It may not confine the exercise to accounting periods producing a net amount due to HMRC. Accordingly, HMRC had underpaid the three claims by £67.05m.

4. Nevertheless, section 80(1B) requires the taxpayer to have paid an amount by way of VAT which was not due. Although mutual cross-claims extinguished by a genuine set-off may amount to payment, that was not this case. The statutory set-off, properly calculated, left HMRC owing Rank more money. HMRC's failure to pay that balance was an underpayment of its own debt, not a payment by Rank to HMRC.

5. The court added that, subject to the applicable time limits, a section 80(1B) claim would not necessarily be an illegitimate reopening of an earlier section 80(1) claim where HMRC's error had caused the taxpayer actually to pay VAT not due. That possibility did not assist Rank on these facts.

• Upper Tribunal (Tax and Chancery Chamber): dismissed Rank's appeal in [2019] UKUT 100 (TCC).
• First-tier Tribunal: dismissed Rank's appeal against HMRC's rejection of its section 80(1B) repayment claim. No citation was stated in the judgment.