Replies to queries - A full recovery

A full recovery

In common with many retail motor organisations, my company has received a substantial repayment of VAT in respect of demonstrator vehicles together with interest. In the letter setting out the details of the repayment, Customs clearly state that the interest element must be declared and is liable for corporation tax. However, it is silent as to whether the VAT element itself is taxable. In this particular case the repayment relates to tax years 1986-87 to 1994-95.
Readers' comments would be appreciated as there appears to be a considerable difference of opinion on whether the VAT element is subject to corporation tax.
Query T16,610                                           — Motoring.

There is clear and substantial authority (including one at House of Lords level) from the World War I excess profits tax cases in favour of the thesis that these recoveries should be attributed back to 1986-87 to 1994-95 (with the result that they would fall out of the tax net): see English Dairies v Phillips 11 TC 597, H Ford v CIR 12 TC 997, CIR v Newcastle Breweries 12 TC 927, Isaac Holden v CIR 12 TC 768 and Worsley Brewery Co v CIR 17 TC 349.
Unfortunately, all these cases came from an era in which little regard was paid by the judiciary to accountancy practice and, even before the era of FA 1998, s 42(1), the courts had rejected reliance on the principle enunciated in the same line of cases to the effect that neither profit nor loss may be anticipated, in favour of accounts drawn up under the best current accounting practice: see Symons v Weeks [1983] STC 195 and Herbert Smith v Honour [1999] STC 173. Furthermore, to give weight to the old cases on particular items of payment and receipt would fly in the face of SSAP 17.
FA 1998, s 42(1) specifies that the starting point for the tax computation for recent accounting periods is accounts for that period drawn up in accordance with generally accepted accounting practice (GAAP). Presumably it is not disputed that these VAT adjustments fall to be included in the computation of trading profit. In these circumstances, it would only be permissible to take them out of the tax computation if 'required or authorised by law'.
While the doctrine of precedent is inherent in our system of statutory interpretation, the House of Lords has, since 1927, both taken leave to revisit its earlier judgments and (last year) laid down that all statutes must now be interpreted on a 'purposive' (rather than literal) basis.
It is therefore almost inconceivable that the courts would give effect to the old cases referred to in the first paragraph of this reply.                                                   

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