The Court of Appeal unanimously dismissed an appeal from Birmingham Hippodrome Theatre Trust regarding HMRC's right to offset previously claimed input tax against a claim for overpaid output tax. While the theatre had incorrectly accounted for and paid output tax on box office receipts, it had also claimed input tax on refurbishment works. The Court confirmed that under section 81(3A) of the VAT Act, HMRC is entitled to offset the input tax claimed in error to prevent unjust enrichment, effectively putting the Trust back in the position it would have been had VAT been implemented correctly. The Court also found that the offsetting did not infringe EU law principles and the Trust's only remaining appeal option is the Supreme Court.

1. Court of Appeal
Birmingham Hippodrome Theatre Trust Ltd [2014] EWCA Civ 684
The Court of Appeal has delivered its judgment in the above case. In a unanimous (3-0)
judgment, the Court has dismissed the taxpayer's appeal which related to whether
HMRC had the right to offset previously claimed input tax against a claim for overpaid
output tax.
The facts of the case are simple. Birmingham Hippodrome (the Trust) operates a
theatre and, historically, it had accounted for output tax on its box office receipts. It
subsequently transpired that, under the VAT Directive, this income should have been
exempt from VAT. However, between 2000 and 2001 the theatre was substantially
refurbished and, on the basis that, at the time of the works, the input VAT was (albeit
incorrectly) attributable to its taxable activities, the input VAT incurred on the works
was claimed by the Trust and repaid by HMRC. Following the eventual resolution of
the three-year cap, the Trust submitted a claim for repayment of the overpaid output
VAT but HMRC then sought to offset the input VAT claimed in relation to the
refurbishment works. The Trust considered that HMRC was not entitled to offset
contending that it was 'out-of-time'. The Upper Tribunal concluded that HMRC did
have the power to offset and the Trust therefore appealed to the Court of Appeal.
In its judgment, the Court of Appeal has confirmed that, under section 81(3A) of the
VAT Act, HMRC is entitled to offset the input tax claimed in error. The Court
confirmed that this outcome has the effect of putting the Trust in the position it would
have been in had the Directive been implemented correctly in the UK during the
relevant period covered by the claim. In other words, while no output VAT should have
been paid at the time, (because the supplies made by the Trust were exempt from
VAT), equally, no input tax should have been claimed either. To do otherwise would
lead to the unjust enrichment of the Trust.
Comment - According to the Court of Appeal, the offsetting allowed for by section
81(3A) does not infringe the principles of effectiveness, equal treatment or legal
certainty and it did not consider that the issues required a reference to the Court of
Justice. Given the unanimous judgment, it would seem that the Trust's only chance of
reversing this decision is to persuade the Supreme Court on appeal that the issues
ought to be referred. The court has also confirmed that HMRC's power to invoke an
offset under section 81(3A) is only available in cases where a taxpayer submits a claim
and does not mean that the normal time limits applicable to HMRC can be ignored.
For further information in
relation to any of the
issues highlighted in this
Case Alert please contact:
The Regions
Stuart Brodie
stuart.brodie@uk.gt.com
London/South East
Karen Robb
karen.robb@uk.gt.com
The Midlands
Mike Sheppard
mike.sheppard@uk.gt.com
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