HMRC 'could pay £1bn in VAT refunds'

HM Revenue & Customs (HMRC) could be forced to pay back £1 billion in overpaid value added tax (VAT) to businesses following a House of Lords ruling on the tax..

Is was decided that HMRC had acted unlawfully in imposing three-year time limits on the reclaiming of VAT on business costs in 1997.

The case was brought by magazine publisher Conde Nast, which has won the right to claim back overpaid VAT on business expenses dating back to 1973 and totalling £100,000.

This ruling is expected to pave the way for thousands of other businesses to seek repayments and experts have said that, although it is difficult to calculate the full extent of the Treasury's exposure, it could be facing a refund bill of as much as £1 billion.

"By rushing to implement time limits on claims in order to minimise a perceived loss to the Treasury, the Revenue's attempts to litigate their way out of a hole have backfired, some 11 years on,'' George Michie, a partner at KMPG, told the Financial Times.

A similar ruling was made by the European Court of Justice in a case brought by Marks & Spencer in 2002 but it related to VAT on sales, not expenses.