VAEC5560 - VAT assessments: types of assessment: protective assessments: an example
The procedural guidance in this manual only covers the VAT Mainframe and VISION processes. For guidance on the Making Tax Digital and ETMP processes for fully migrated customers, see VAEC0200 and the Making Tax Digital for VAT compliance toolkit.
Please note that in the interests of simplicity this example does not consider the issue of set-off or unjust enrichment, which might impact on the situation. In a real case you would need to consider those aspects. Please refer to the appropriate guidance as necessary.
ABC plc makes supplies of widgets. It considers that these are zero rated. HMRC views the widgets as standard rated and assesses ABC plc for an under-declaration of output tax. ABC plc appeals to the First-tier Tribunal (FTT).
DEF Ltd supplies similar widgets and is also assessed by HMRC. As the facts are identical, DEF Ltd appeal against its assessment is stood behind the appeal made by ABC plc.
The FTT finds for HMRC and rejects the appeal.
ABC plc appeals to the Upper Tribunal (UT), arguing that the FTT erred in law. The UT allows the appeal and overturns the earlier decision.
There is now a declaratory judgment against HMRC and the law is that these widgets are zero-rated.
However, HMRC is still of the opinion that the widgets should be standard-rated, and is given leave to appeal to the Court of Appeal.
The assessment against ABC plc is maintained to protect HMRC’s position, but it is not enforceable and if appropriate must be credited to the business.
XYZ plc also makes supplies of similar widgets. Learning of the UT decision, it makes a claim under s80 VATA 1994 for output tax over-declared. The officer for XYZ plc credits the claim with statutory interest. They make a protective assessment for the amount of the claim, and a further one covering the statutory interest.
The case is not heard in the Court of Appeal for over a year following the UT decision. In the meantime all three companies submit VAT returns on the basis that the widgets are zero-rated. HMRC raises protective assessments for these returns in line with its view that the widgets are standard-rated.
Eventually the Court of Appeal upholds HMRC’s appeal and rules that the widgets are standard-rated. Leave to appeal is refused, the litigation process is now over and the law of the land is that the widgets are standard-rated.
HMRC now enforces the protective assessments against ABC plc, DEF Ltd in relation to their inaccurate returns; and against XYZ plc in relation to their wrongly credited output tax claim.