Giant Marshmallows and Cereal Bars – No, not my 2023 Diet Plan
In previous news we reported back in October the VAT liability ruling at a First Tier Tribunal that giant marshmallows sold to be “toasted” were not to be treated as standard-rated confectionary but as zero-rated “food” for human consumption. Now we have news of the appeal by Morrisons in the Upper Tribunal against the original First Tier Tribunal’s rejection of the zero-rated qualification of these bars – specifically Nakd and Organix. The matter has now been referred back to the First Tier for a further review of the case made by Morrisons that the “absence of cane sugar, butter and flour” would justify the zero-rating of the bars as the original First Tier may not have considered how these factors may have affected their view that zero-rating did not apply.
The question of VAT liability rumbles on therefore but, in addition, within this case is another challenge from HMRC. Morrisons argues that it has overdeclared VAT on sales of these items as they should have been zero-rated. However, they have also recovered VAT on the costs of buying these items in from their suppliers. If they win the argument that these items are zero-rated then the VAT charged to them is not input tax and should not have been recovered. Hence, to avoid any unjust enrichment challenge, you would expect that Morrisons would then approach its suppliers to ask for VAT credit notes to correct the VAT position. However, for the goods supplied more than four years ago the supplier cannot balance their own VAT position by submitting an Error Correction Notice to HMRC for the VAT they, themselves, overcharged. This could leave Morrisons in the position whereby – if their zero-rating VAT argument is successful for these products – HMRC could seek to argue unjust enrichment and reduce their claim by the earlier years input tax “overclaimed” by Morrisons; as to not to do so would leave Morrisons having claimed VAT on supplies to which it was not entitled. The case report already indicated this point is in HMRC’s mind.
Unjust Enrichment – What is it?
Where a taxpayer has charged VAT on its supplies and found that this output tax was not due, it can make a repayment claim for this overcharged output tax to HMRC. However, HMRC will look at whether the repayment of the output tax would put the taxpayer in the position of securing a windfall, as opposed to either passing that VAT adjustment across to its own customers or being able to show that the charge of VAT had eaten into their profit margin and been absorbed by the taxpayer – perhaps, as they felt that the market would not accept a higher price for their supplies.
Under VATA 1994 s.80 HMRC do not have to meet the claim if they feel that the repayment would unjustly enrich the business and this includes by a value of input tax that has been recovered which now falls out of time to adjust.
This should not stop any taxpayer seeking a repayment for VAT they have charged in error on their supplies – we recently supported a client with a six-figure VAT reclaim where they were able to demonstrate their educational services were VAT exempt not standard rated, and that they had been absorbing the VAT charge due to the competitive and fixed price nature of their contracts with their council clients. But it does show how full regard should be taken to repayment claims of this nature.
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