TC09583 - [2025] UKFTT 00865 (TC)

The Appellant’s case is heavily predicated on the absence of any statutory mechanism for the verification, withdrawal, or refusal of credits.

We start with the question of verification. HMRC accept there is no explicit statutory mechanism by which they are entitled to verify returns and/or claims to credits. They contend that their power to verify the contents of a return is implied under their care and management provisions.

We agree that must be the case. That there is some general power to verify the accuracy of a return is implicit in the terms of paragraph 2(3)(c) and (d) Schedule 8 FA 17. Paragraph 2(3)(c) specifies as a relevant default failure to keep documents “necessary to verify returns required [by regulations 21 and 22 of the Regs]”. Paragraph 2(3)(d) specifies a default where returns required [by regulations 21 and 22 of the Regs] are incomplete or incorrect. Without an implied power to verify the return HMRC would have no practical means of determining the completeness or accuracy of the return. In light of these assessment powers (which only depend on regulations which HMRC have enacted) we consider section 9 CRCA and section 12(1) IA on their terms would “fill” any statutory gap that may be said to exist.

We also consider that conclusion to be entirely consistent with the position taken by the High Court in Tradecorp at paragraph [18]:

“[HMRC] are under a duty to conduct a reasonable and proportionate investigation into the validity of claims for a refund and repayment … The duty to investigate is applicable both to the claim to the refund and repayment and to the question of whether there is a right of set-off (or indeed a claim for further payment from the taxable person). … The availability and proper exercise of [HMRC’s] powers of investigation are essential to maintain the fiscal neutrality of that and prevent refunds being made to parties not entitled to them.”

Whilst the point was not in issue between the parties in DCM by the time it reached the Supreme Court, it is at least implicit that the position in Tradecorp was accepted by the Supreme Court in DCM (see paragraph [30]).

DCM is also relevant to our consideration of what powers HMRC have where the verification exercise identifies that the correct amount of tax has not been declared. The case concerned HMRC’s powers under the VAT regime and in particular whether there was a power to verify a return on which the relevant taxpayer had claimed input tax exceeding output tax such that the return indicated that the taxpayer was due to be repaid a VAT credit as defined in section 25(3) VATA.

As with the SDIL regime, VAT is a self-assessed tax under which taxpayers render returns on a prescribed accounting period by prescribed accounting period basis on which they declare output tax due on taxable supplies made, claim by way of deduction against such output tax input tax on purchases or other inputs and pay or reclaim the net difference as shown on the return. DCM challenged HMRC’s right to verify the return and reduce the input tax claimed before making a VAT credit repayment. DCM contended that HMRC could only reduce the input tax claim by raising an assessment for the prescribed accounting period in question. In the context of that case, by the time the return had been verified and the decision reached to refuse the claim to input tax, any such assessment would have been out of time.

The Supreme Court confirmed that after carrying out the verification process HMRC had the power to give effect to its result by intimating their decision to the taxable person to refuse to pay the claim in full or in part (see paragraph [31]), such power being implicit from the provisions of section 25(3) (definition of VAT credit), 73(1) (best judgment assessment provision where returns are incomplete or incorrect) and paragraph 1 of Schedule 11 (care and management provisions) VATA (see paragraphs [29], [32], [33] and [42]). With nothing within VATA otherwise inconsistent with an implied power to both verify and to deny entitlement to a repayment without the need for an assessment, the Court determined that HMRC were entitled to simply deny the repayment claimed.

The Appellant contended that the more apposite Supreme Court authority was OWD Ltd v HMRC [2019] UKSC 30. That case concerned the introduction of a regulatory scheme requiring wholesalers supplying duty paid alcohol to be approved by HMRC. Approval was only given where HMRC were satisfied the person seeking to carry on the activity is a fit and proper person. OWD had been refused approval but sought to contend that temporary approval could be granted pursuant to HMRC’s general powers under section 9 CRCA despite the absence of an express power to grant temporary approval. The Court declined to infer a power to grant temporary approval. The court accepted that there are situations which would cause a court to accept that HMRC have ancillary powers under section 9 CRCA but whether there are such powers depends on the general attributes, and detailed provisions, of the particular statutory scheme in which the question of ancillary powers arises. The court determined that section 9 CRCA “concerns ancillary powers which are necessary or expedient in connection with [HMRC’s] exercise of their functions, or incidental or conducive to that exercise, not ancillary powers which undermined or contradict those functions.”

The Appellant contends that in a situation in which Parliament had given express power to enact regulations providing a mechanism for withdrawal of credits (either by HMRC or by way of the liable person amending/correcting the return) where the conditions of entitlement are not met, it would be contrary to the intention of Parliament and the infrastructure of the regime to allow HMRC to rely on inferred or ancillary powers when it was anticipated that express powers would be given.

We do not consider that OWD assists the Appellant in the context of a general power to verify whether claims to credit meet the requirements of regulations 15 to 18 of the Regs for the reasons stated above.

Neither do we think it assists in connection with HMRC affecting a correction to a return in connection with both the charge to SDIL and a claimed credit. In this regard we note:

We consider that these provisions expressly contemplate that where a correction/amendment is made by a liable person HMRC will give effect to that correction without the need to assess in much the same way as the Supreme Court determined that HMRC did not need to assess to recover sums incorrectly claimed by way of VAT credit. Inferring a power to do so is therefore consistent with the legislative scheme. The effect of this conclusion is that for the accounting periods ended 31/12/2019 to 31/12/2020 we consider that HMRC are entitled to give effect to the corrections made by the Appellant on 2 November 2022.

We are not prepared to similarly infer for accounting periods in which the Appellant did not submit a correction. When enacting FA 17 Parliament consciously placed the care and management of SDIL with HMRC; in doing so Parliament can be assumed to have taken account of the provisions of sections 5 and 9 CRCA and sections 11 and 12 IA. We are also entitled to presume that Parliament understood that the care and management provision imposes a duty on HMRC to collect the right amount of tax. Presumably for this reason, Parliament did not authorise the enactment of regulations concerning such matters as verification of returns, rather, it assumed such a general power to do so and provided for HMRC to assess where the outcome of verification revealed that the correct amount of tax had not been collected. In contrast Parliament legislated expressly for regulations to provide for the withdrawal of credits and for the correction of errors. Whilst not a complete framework we consider the provisions referred to above facilitate a conclusion that section 9 CRCA provides for an ancillary power to process a correction including a request from a liable person to reduce the value of credits previously claimed.

However, for reasons unknown and unexplained HMRC did not similarly seek a regulation wich provided them any express powers to deny/reject/withdraw credits to which it is possible to apply section 9 CRCA and provide ancillary powers. In our view the only statutory power (express or implied) capable, if at all, of compelling the withdrawal of an incorrectly claimed credit is the power to assess.

We consider this conclusion to be consistent with that reached in a very different context by the High Court in Oliver Fisher (a firm) v Legal Services Commission [2002] EWH 1017 (Admin) although we did not derive any particular direct assistance from that judgment itself in reaching our conclusion.