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Tribunal Defines ‘Payment’ in VAT Context

A businessman has succeeded in overturning a £500,000 VAT assessment on the basis that it was issued outside the three-year time limit set out in section 80(4) of the VAT Act 1994. In ruling on the case, the First-Tier tribunal gave useful guidance on the correct interpretation of the word ‘payment’ as it appears within regulation 94(B) of the VAT General Regulations 1995.

The appellant was issued with the VAT assessment by Her Majesty’s Revenue and Customs (HMRC) in 2008 in respect of services he had provided as an intermediary for prospective purchasers of capital redemption bonds. The services had been provided prior to 31 March 2005 to four companies (the companies) in which the appellant had an indirect 50% interest.

Invoices were not issued until January 2006 and the appellant did not receive any cash until 1 April 2006 so that, in the context of the three-year time limit, a decisive issue arose as to the date on which ‘payment’ was made. The appellant argued that the entire demand was issued too late in that the whole of the period to 31 March 2005 was time barred from assessment.

HMRC lawyers agreed that part of the assessment was out of time, but submitted that the appellant remained liable for more than £300,000 in respect of the period between 1 October 2004 and 31 March 2005. That was on the basis that the money owing to him, whilst not in fact changing hands, had been credited to his director’s loan account and registered as a debt on one of the company’s accounts.

The tribunal noted that ‘payment’ had been defined as an action which discharges the liability of a debtor under a contract and leaves the creditor with no right to sue for payment thereunder. The word was capable of meaning something other than the simple transfer of cash and would depend upon the context in which it was used.

Allowing the appeal, the tribunal preferred the taxpayer’s arguments that he had not been remunerated for his services prior to 31 March 2005. Regardless of the accounting position within the companies, there had been no discharge of the relevant liabilities and, therefore, nothing that could constitute ‘payment’ within the meaning of regulation 94(B).