When should you submit a protective claim to HMRC?

Unjust enrichment

You must firstly decide if you have passed on the VAT to your customers for these goods or whether you have sold them on a VAT-inclusive basis in order to, say, compete with similar trading businesses in your area. For example, many catering businesses charge a VAT-inclusive price for a meal, e.g. £11.99 for pie and chips, whereas a business selling goods to other business customers will often apply a mark-up based on the VAT-exclusive price and then add 20% VAT, e.g. £100 + £20 VAT.

If you’ve added VAT to your prices, any refund from HMRC must be repaid to your customers and not treated as a windfall to your own profits. This outcome is known as “unjust enrichment”.

It’s possible to have a partial outcome with unjust enrichment, i.e. you have passed on some but not all of the VAT to your customers. You can retain part of the refund in this case.

The accounting and claim procedures of unjust enrichment (see here) must be closely followed, otherwise HMRC will reject your claim.

Four-year time cap

Any errors made on your past returns, for both over and underpayments of tax, can only be corrected for the last four years. Once this time window has expired the errors cannot be adjusted. For example, for a date beginning 13 August 2025, and if your business submits calendar quarter returns, you can only correct errors made on returns from September 2021 onwards.

Impact of tribunal decision

Most VAT disputes between taxpayers and HMRC are resolved by judges in the First-tier Tribunal (FTT). A limited number of appeals proceed to the Upper Tribunal (UT) and occasionally to the Court of Appeal (CA) or Supreme Court (SC):

1. FTT decisions are only binding on the parties involved in the case, i.e. HMRC and the taxpayer. The decision cannot be extended to other businesses that might make similar supplies unless HMRC accepts the court’s decision and amends its published guidance.
2. The UT’s decisions are legally binding on the FTT, i.e. the FTT judges must follow the UT’s interpretation of the law in similar cases.
3. Decisions made by the CA and finally the SC are also legally binding and the UT is bound by them.

If you have a dispute with HMRC and quote case law to support your arguments, it’s better to quote verdicts made by the upper courts.

Protective claim to HMRC?

Some disputes can take many years to resolve. For example, a current dispute about whether Mega Marshmallows qualify as zero-rated food has been considered by two separate courts and referred back to the first court to reconsider the facts. If you think that your business has overcharged VAT based on a court’s decision, consider making a protective error correction claim to HMRC as soon as possible to protect the four-year time window. HMRC will not repay it but you have put your foot in the door.

Submit Form VAT652 to HMRC with a covering letter. Make sure that HMRC acknowledges receipt of your claim in writing.