HBOS Plc & Anor v The Commissioners for HMRC

For the purposes of Value Added Tax Act 1994, an error arising from unlawful VAT legislation may constitute an “error on the part of the Commissioners” where HMRC’s relevant act or omission derives from that legislation. Section 78(1)(d) can cover delay caused by a taxpayer’s delayed repayment claim. The court must determine, on the evidence, when the taxpayer could and would have made the claim absent the error. Interest may therefore run from a date before the actual claim, provided the taxpayer ultimately made a valid claim for the amount due. Procedural requirements for making the claim remain relevant, and the counterfactual must address the factual circumstances of the claim.

The appellants claimed VAT bad debt relief for hire-purchase supplies made between 1989 and 1997. Their claims were initially rejected because Value Added Tax Act 1994, section 36(4)(b), required property in supplied goods to have passed. That condition was held unlawful and disapplied in GMAC UK v HMRC [2016] EWCA Civ 1015. HMRC then paid the refunds and interest from the dates of the appellants’ claims.

The FTT held that the statutory condition was an error of Parliament, not HMRC, and rejected interest for the earlier period. The Upper Tribunal had to decide whether the legislative error fell within section 78 and whether section 78(1)(d) permitted interest from dates before the actual claims. HMRC also sought to rely on an attribution issue concerning hire-purchase instalments.

1. Appeal allowed. The FTT’s decision was set aside and remade. The parties were left to determine the quantum of interest, failing which the issue would return to the FTT.
2. The phrase “error on the part of the Commissioners” in section 78(1) must be construed in its statutory and EU-law context. It is capable of covering an error arising from the enactment of an unlawful VAT condition. HMRC is the responsible State body in relation to the collection and management of VAT, and its acts or omissions may derive from the unlawful legislation. Excluding such errors would create a serious gap in the statutory scheme for redress.
3. Section 78(1)(d) is not confined to delay occurring after an actual claim has been made. It can cover delay in making a claim where the delay was caused by an error and the taxpayer subsequently makes a valid claim for the amount due.
4. The applicable period under section 78(7)(a) requires a counterfactual inquiry. The question is when, apart from the error, HMRC might reasonably have been expected to authorise payment. That requires consideration of whether the taxpayer not only could but would have made the claim earlier. The answer depends on the evidence.
5. The tribunal found that, but for the unlawful property condition, the appellants would have made their claims on the earlier dates and HMRC would have authorised payment by those dates. Interest therefore ran from the earlier dates. The question whether the refunds became due once the substantive statutory conditions were met, irrespective of a claim, did not need to be decided.
6. HMRC was refused permission to rely on the attribution issue. Although it had emerged during the FTT hearing, it should have been raised earlier. Fair determination would have required fuller pleadings and evidence, and allowing it at that stage would have caused procedural unfairness.

• Upper Tribunal (Tax and Chancery Chamber) — The appeal from the FTT was allowed. The FTT’s decision was set aside and remade so that the statutory error fell within section 78 and interest ran from the earlier dates: [2023] UKUT 13 (TCC).
• First-tier Tribunal (Tax Chamber) — The FTT decided in HMRC’s favour, holding that interest ran only from the dates of the appellants’ claims: [2021] UKFTT 0307 (TC).