Revenue & Customs is facing a £1 billion loss after losing a landmark legal battle on VAT refunds brought by Condé Nast, the publisher of Vogue and Vanity Fair.

Upholding an earlier decision from the Court of Appeal, the House of Lords ruled that a three-year time limit on when businesses can reclaim overpaid VAT was illegal and could not be enforced by the Revenue.

Condé Nast, which spearheaded the case on behalf of several other businesses, challenged the Revenue after it refused to repay most of the VAT the magazine publisher had overpaid between 1973 and 2003.

Condé Nast made its claim in 2003 but Revenue argued that since it had introduced a three-year cap on back VAT claims in 1997, Condé Nast could claim overpaid VAT only from 2000 onwards.

The Revenue persuaded the Tax Commissioners and the High Court that the three-year limit meant that Condé Nast was not entitled to claim for the period 1973 to 2000.

Condé Nast, advised by Deloitte, took the case to the Court of Appeal, arguing that the three-year time limit — introduced in 1997 — was illegal because it came into effect without a transitional period.

The effect, Condé Nast, said, was that anyone who could have made a claim back to 1973 the day before the three-year cap was introduced was immediately barred from doing so.

This was in breach of European law that says that changes in UK tax law must be accompanied by a “reasonable” transitional period that would allow companies to get their claims in.

Agreeing with the Court of Appeal, the House of Lords voted 4-1 this morning that the three-year limit was illegal and should be “disapplied”.

In his judgment, Lord Hope of Craighead said: “To be compatible with EU law, taxpayers were entitled to be told in advance of any transitional arrangements that would enable them to submit late claims . . . despite the introduction of the time limit.”

"Taxpayers were entitled to be given sufficient notice to familiarise themselves with the new regime, including the period of grace that was to be allowed for the submission of accrued claims during a transitional period,” he added.

Hartley Foster, a tax partner at DLA Piper, said: “This case potentially affects all businesses that may have valid claims for underrecovered VAT, but who were unable to reclaim it because of the three-year cap.

“The amount that UK companies could recoup following the case may be in the region of £1 billion plus interest,” he said.

Andrew Loan, a Macfarlanes tax expert, said: “This decision opens the floodgates to claims for repayment of input VAT incurred since VAT was introduced in the UK in 1973. Around 700 similar cases have been brought by other taxpayers, including EMI and BT."

Roger Bindschedler, a tax partner at Howard Kennedy, called the decision a “great, though not unexpected, win for the taxpayer”.

In a statement, HMRC said: "In view of the complexity of the issues, HMRC are considering the terms of the judgment and expect to make a further announcement in due course."

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