Customs ordered to repay pounds 35m VAT

The High Court yesterday delivered a blow to the Customs & Excise over its increasingly tough policy on value added tax collection by ruling that it had acted illegally in refusing to refund about pounds 35m that had been paid in error.

The hard-hitting ruling was hailed by accountants as great news for the business community, which had been waging a campaign against the Government's attempts to reduce its exposure to large VAT refunds by imposing a time limit on claims. Most advisers accept the need for some limit and propose six years, in line with the period that applies to Customs officials investigating taxpayers' affairs.

However, though Customs is not expected to appeal against the judgment, it immediately made clear that the taxpayers' victory may be shortlived because it still intends to include proposals to introduce a three-year cap in next week's Budget.

Though the organisations - including the mail-order companies GUS and Kay & Co and the drinks group Allied Domecq will be entitled to immediate payment of the money, Customs indicated that it would seek to claw back the sum once the proposals become law, in about three weeks.

The case stems from a ruling by the VAT Tribunal earlier this month that - though Customs had imposed the cap in July - claims going back several years were valid because the cap had not yet been approved by Parliament. Since the tribunal could not direct Customs to pay back the money, taxpayers were urged to issue writs against the organisation.

However, the issue goes back much further, to a spate of cases earlier this year that raised the spectre of the Government having to pay billions of pounds in VAT refunds to such businesses as retailers operating interest- free credit deals and operators of company car fleets.

The rulings came shortly after the revelation that the approximately pounds 43bn in VAT received by the Government in the financial year to the end of March 1996 was significantly less than had been expected.

In an attempt to give greater certainty to the Treasury's revenues, Customs & Excise announced in July that any business which discovered it had overpaid VAT could only go back three years rather than claim an unlimited refund, in some cases going back to the introduction of the tax in 1973.

Since then, Customs has been refusing refunds of amounts paid more than three years earlier because "it would waste business time and public resources if the department were to refund such money only to claw the money back".