Dixons loses £1.8m VAT claim on bouncing cheques

Retail chain Dixons has failed at a First Tier Tribunal (FTT) appeal in a bid to reclaim £1.8m of overpaid VAT on cheques which had been dishonoured, on the basis it was out of time for a refund

The tribunal head the company had a bespoke retail scheme agreement (BRSA) for the purpose of accounting for VAT to HMRC. It was accepted that it paid over VAT to HMRC on sales for which it had received a cheque that was later dishonoured and that in the period 5/12/96 to 6/2/2003 it did not reclaim this VAT.

In September 2011 Dixons identified that this had occurred and made a claim to HMRC to recover the overpaid VAT. HMRC rejected this claim on the basis that it was out of time, because it was a claim under s80 VATA 1994 and s80 claims are subject to the four-year cap. Dixons appealed this decision but the appeal was held over pending a decision on a similar issue involving Leeds City Council. HMRC won the Leeds City Council case and Dixons withdrew its appeal.

Dixons then adjusted its 01/2018 VAT return to recover the VAT overpaid on the dishonoured cheques on the grounds that its retail scheme contained no time limit by which adjustments should be made. The adjustment was for the amount of £1,876,141. HMRC refused to accept the adjustment, and the case went to appeal. [Dixons Retail plc and the Commissioners for Her Majesty’s Revenue and Customs, [2019] UKFTT 714].

The tribunal heard that HMRC’s case was that Dixon’s BRSA set out how it was to account for VAT, including offsetting VAT on dishonoured cheques. As Dixons had failed to do this in the period in question, Dixons had over-declared its liability for output tax in the relevant periods. 

HMRC’s position was that Dixons had therefore been entitled to make a claim to recover such over-declared VAT under s80 VATA; instead it had merely made an adjustment in its 01/2018 VAT return which it was not allowed to do; and in any event, even if that adjustment was to be treated as a claim under s80, it had made the claim too late.

For its part, Dixon argued that it accounted for VAT under a retail scheme. The retail scheme was a complete code for VAT accounting. Its retail scheme permitted it to deduct from its daily gross takings (DGT) the amount of dishonoured cheques and to do so without any express or implied time-limit. That is what it had done in its VAT return for 01/18. It did not matter that the cheques had been dishonoured, and were in respect of supplies which had taken place, many years earlier, as there was no time limit on making the adjustment.

The FTT dismissed Dixon’s appeal, on a number of grounds. These included the view that retailers could not make claims for bad debt relief (Regs 165-172B, 1995 VAT Regulations), because bespoke retail schemes included provisions for claiming bad debt relief.

Although not expressly stated within the retail agreement or the legislation governing retail schemes (Reg 67, 1995 VAT Regulations), it was implicit that Dixons should make adjustments for dishonoured cheques at the time it became aware that the cheque had been dishonoured; and because Dixons had failed to adjust its VAT calculation at the time the cheque was dishonoured the correct recourse was to make a claim under s80. As Dixon’s claim was made outside the four-year time limit, its claim was time barred.

The tribunal also pointed out that Dixons’ 2002 BRSA did provide for errors. The scheme had a term which stated: ‘In the circumstances that Dixons Group plc fails to calculate output VAT on retail sales according to the methods and adjustments agreed within this scheme, it shall recalculate the scheme correctly and accordingly claim or pay any VAT overpaid or underpaid as appropriate.’

The FTT agreed with HMRC that where it refers to ‘claim’, that must be a reference to a claim under s 80 VATA. It said this provision clearly indicates that ex post facto adjustments were not to be made by adjusting the DGT but by making a separate claim. 

The tribunal said: ‘The necessary implication was that such a claim must meet the requirements of VAT legislation, such as those of s80 VATA, VAT Reg 29, 34 or 38. It clearly indicates that the retail scheme was not a complete code: we think that is clear in any event for reasons already given.’

Dixons sought to argue that the position in 2002 changed from the 1999 BRSA and that that therefore implies that it ought to recover all VAT on dishonoured cheques prior to the 2002 BRSA coming into force. The FTT did not agree, saying that none of the BRSAs permitted ex post facto adjustments to the DGT. 

Sarah Kay, senior tax writer, Croner-i Ltd, said: ‘Dixons argued that neither the law under which retail schemes are agreed (Reg 67, 1995 VAT Regulations) or its bespoke agreement with HMRC made specific reference to any time limits.

‘However, if correct, this would mean that a retailer could make adjustments to its daily gross takings at any point. The FTT rejected an interpretation of the law which would enable Dixons to adjust for VAT which, in some cases, was overpaid over 20 years ago.’

Dixons Retail plc and the Commissioners for Her Majesty’s Revenue and Customs, [2019] UKFTT 714

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