Having worked in indirect tax for over 25 years, I am well aware of the importance of not simply accepting HMRC’s viewpoint without a reasonable challenge. I regularly deal with taxpayers in dispute with HMRC. On many occasions, the quality of HMRC’s work is poor, with officers not taking the time to explain their concerns to taxpayers. Frequently, the officer finishes the visit without advising that there are any issues only for an assessment and penalty to drop through the post. Importantly, when placed under close scrutiny, HMRC’s position often does not hold up.
This was illustrated very clearly in the recent First Tier Tribunal decision in Gekko & Company Ltd v HMRC (TC06029).
This case related to an appeal against VAT of £69 (sixty-nine pounds) and three penalties of £780, £8.85 (eight pounds eighty-five pence) and £10.35 (ten pounds thirty five pence). The values were so small, the Tribunal stated “We have put the amounts in words in the last paragraph to make it clear that there is no typographical error in setting out the amounts in dispute. This decision is a great deal longer than we would ordinarily write in a case involving such small amounts: this is because there are a number of disturbing features about the way the case has been conducted by the respondents (HMRC)."
The appellant was a property developer who, in the opinion of HMRC, had made a number of errors on their VAT return. The largest error related to VAT of £5,200 which was not declared in relation to the sale of an opted property. The error was identified by the company’s advisers and subsequently corrected on a later return, albeit not the first available return after the error was spotted. The other areas related to VAT recovered on motor fuel (£88) and expenses which HMRC did not consider were business expenses (£59).
When it came to the application of penalties, HMRC treated the first error as “deliberate” as the error was not corrected immediately. However, HMRC treated the disclosure of the error as “unprompted”. The other two errors were categorised as “careless” and “prompted”. In each case, to reflect the assistance of the taxpayer, the maximum available reduction was allowed by HMRC. However, this still resulted in a penalty rate of 20% being applied to the first error and 15% to the other errors. The taxpayer requested a review of the officer’s decision and the review officer agreed that the officer should reconsider the categorisation of the behaviour in relation to the first error as deliberate. HMRC amended the penalty to careless, which taken with an unprompted status would have led to the penalty being reduced to zero, and given the value still at stake in relation to the other matters, would have led to HMRC not pursuing the position to appeal. However, without alerting the taxpayer to the change, HMRC also amended the categorisation of the disclosure to “prompted” which meant that a 15% penalty was still applied, allowing the matter to be pursued further.
Throughout the decision, the Tribunal judge is scathing in his assessment of how HMRC has handled this case. In particular, the reason for the change to “prompted” given by the officer when challenged by the taxpayer was singled out for specific criticism. The decision states “(the officer’s) explanation is simply wrong. It is more than that: it is inexplicable…”. In an unusual move for a standard case at the First Tier Tribunal, the Tribunal also awarded costs against HMRC. In reaching this decision, the Tribunal held that “a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings”. The Tribunal stated:
“We consider, having thought about this long and hard, that there are two possible explanations for this volte face. One is that there was incompetence on a grand scale. The other is that there was a deliberate decision to keep the dispute alive, when on the basis of the reviewing officer’s remarks it would have been discontinued, by seeking to revisit the “prompted” issue. The facts that have caused us not to dismiss this possibility include the minimal information about the change with no explanation and the hopelessly muddled response with its spurious justification that (the officer) sent when the appellant spotted the change.”
The Gekko case is an extreme example of HMRC’s processes breaking down. However, it is a useful reminder that when you receive an assessment, surcharge or penalty from HMRC, you should not simply accept it. It is always best to request a review by a VAT specialist as there are often strong grounds to challenge HMRC’s decision.
If you have recently received a VAT assessment from HMRC that you are unsure of, or if would like any further information, please contact Alistair Duncan, Director (firstname.lastname@example.org) or your usual AAB contact.