Taxpayer awarded costs over HMRC’s unreasonable conduct

A recent VAT case heard by the First-Tier Tribunal (Gekko & Company Ltd v HMRC (TC06029)) highlighted worrying aspects of HMRC’s handling of the case and even awarded costs against HMRC. The Tribunal clearly felt strongly about the case, with the decision stretching over 29 pages for a case involving an assessment to VAT of £69 and three assessments of penalties of £780, £8.85 and £10.35 respectively.

The decision begins by stating that it , “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 case involved a property developer company who HMRC claimed had made errors on their VAT returns, with the biggest one being an omission of £5,200 of output tax (which the Tribunal later found to actually be £4,880).

The penalty notices were found to be invalid because the original assessments had been withdrawn and new ones had not in fact been issued. The tribunal found that, even if they had been valid, the penalty of £780 should have been reduced to nil as the behaviour was careless but the disclosure was unprompted and that the other two penalties should be cancelled as there was no inaccuracy.

In deciding to award costs to the taxpayers, the Tribunal were particularly critical of HMRC. We enclose a passage from this below regarding HMRC’s change of opinion from an unprompted to prompted disclosure:

“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 Miss Pearce sent when the appellant spotted the change. Of course we have had no evidence from those involved and do not intend in this decision to make any findings about the matter. But it is something we have to take into account in deciding whether HMRC’s conduct in this case was unreasonable.”

The Tribunal cancelled the VAT and penalties and awarded costs to the taxpayer.

Overall, this case seems to echo our recent experiences with HMRC and shows a worrying trend in decreasing quality of HMRC case handling and emphasis on winning at all costs, regardless of the merits of individual cases.

VAT Penalty Reduced – J & W Brown

A recent case concerned penalties that arose on a taxpayer due to a technicality. The taxpayer had run a business as a VAT registered sole trader. He brought his son in as a business partner, which was therefore technically a transfer to a partnership and a transfer of a going concern (TOGC) for VAT purposes.

The taxpayer did not realise this and did not notify HMRC until around 2 years later. However, he continued to submit his sole trader VAT returns and pay the tax due through this period. Two of the returns in the period were submitted late.

HMRC therefore sought penalties for late registration by the new partnership of more than 12 months and charged an 18% penalty. They did, however mitigate this by 70% as the VAT returns and tax were submitted through the sole trader registration and there was therefore no loss of tax.

The First-tier Tribunal felt that as the error was a technicality and that there had been no loss or administrative inconvenience to HMRC, the penalty should be reduced by 90% instead and lowered the 18% penalty to 12.5%. They also noted that the taxpayer had made a voluntary disclosure and that HMRC’s protracted case management had been inappropriate, causing “significant inconvenience and expense’” to the taxpayer

Overall the penalty was reduced from £582 to £100 and so the taxpayer’s appeal was allowed in part.

This case shows the continued firm approach that HMRC appear to be taking with penalties for minor mistakes. However, the Tribunals continue to provide a safety net to taxpayers and the comments of the Tribunal showed the importance of taking the first steps and making voluntary disclosure before HMRC find the error. If you would like assistance with making a disclosure or have any concerns about past transactions, please get in touch with us as we would be delighted to assist.

When Does VAT become Unpaid? – Taste Of Thai Ltd (TC2721)

The recent tribunal case of Taste of Thai Ltd (TC2721) dealt with a penalty for late VAT registration; specifically when the VAT became due for the purposes of calculating the penalty rate.

Background

The restaurant deregistered for VAT in 2008 as its turnover fell below the threshold.

On 17 November 2011 the business notified HMRC that it should have been re-registered for VAT from 1 March 2011.

HMRC checked the figures and found that it should have actually been re-registered for VAT from November 2010 (it had failed the historic test at 30 September 2010).

As a result a penalty for late registration was issued, with HMRC acknowledging that the failure to notify was not deliberate and the disclosure unprompted.

HMRC said that the disclosure was made more than 12 months after the tax became due. Therefore the penalty range was 10% to 30%.

HMRC levied a penalty of £966; equivalent to 10% of the tax due, so full mitigation for the quality of the disclosure was given.

The Case

The taxpayer appealed the penalty on the basis that the disclosure was made within 12 months of the tax being due.

The legislation states that a lower minimum rate of 0% will apply if HMRC ‘becomes aware of the failure less than 12 months after the time when tax first becomes unpaid by reason of the failure’.

Therefore the tribunal had to establish when the tax became unpaid.

It was agreed by both parties that the taxpayer should have re-registered for VAT from 1 November 2010.

However, HMRC felt that the tax become unpaid at this point, i.e. from when they should have charged VAT on their goods and services. Therefore as the disclosure was made on 17 November 2011 more than 12 months had passed.

Conversely the taxpayer argued that the VAT did not become unpaid until it was required to be paid over to HMRC, i.e. a month after the quarter end.

The earliest possible quarter end would have been 30 November 2010, with the tax being due on 31 December 2010.  Therefore the taxpayer argued that the disclosure was made within 12 months.

The Decision

The tribunal said ‘it would have been a very simple matter, if parliament had intended Date 1[the date tax becomes unpaid] to be…. the effective date of compulsory registration, for it to say so’.

The logic behind the wording was so that a taxpayer who is initially a repayment trader is not deprived of the opportunity of a 0% non-notification penalty until, broadly 12 months after he becomes a “repayment” trader.

‘There is a link between the 12 month period starting to run and the start of the potential loss to the public purse’.

Therefore they found ‘no reason not to take these words [of the legislation] at face value’

As a result they agreed with the taxpayer and concluded that the ‘time when the tax first becomes unpaid’ is the due date for payment of the VAT.

The earliest possible date for payment was 31 December 2010 and the disclosure was made on 17 November 2011; therefore the disclosure was made within 12 months.

The tribunal found ‘no reason to interfere with HMRC’s view that the quality of the disclosure merited 10% mitigation within the available range’.

The taxpayer’s appeal was allowed and the penalty reduced to 0% – i.e. no penalty would be due.

Rather interestingly as an aside the tribunal said that if the disclosure had been made later (i.e. January 2012), they would have required evidence of HMRC policy on the first VAT accounting period which would have been allocated.