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The penalty notices were found to be invalid because the original assessments had been withdrawn and new ones had not in fact been issued.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.
Typically, PAYE has been described as an ‘approximate’ method of collecting tax due, which remained the ultimate liability of the employee.
Recent judgements, including the case of Paringdon Sports Club, suggest more of the risk may fall on the employer.
In addition the risk may be worse with the current HMRC penchant for penalties. Many advisors will be familiar with their tendency to seek around 15% extra tax for relatively minor ‘careless’ errors. This represents increased risk for business and their advisors.
There are methods related to potentially mitigating or suspending such penalties.
To avoid embarrassment and excessive cost a prudent review may seem sensible?
Whilst most businesses operate routine PAYE relatively easily with the backing of software, experience suggests that ‘unusual’ or one off events can cause problems.
These days such errors can lead to expensive penalties, so procedures should be put in place to check the correct treatment on one off matters and if necessary take advice.
On the penalty front the case of P Steady shows that it can be worth appealing against a penalty imposition. In that recent case the taxpayer managed to get a penalty suspended where, by oversight he had put down bank interest earned in incorrect years. The Tribunal said ‘The mere fact that this is an error in a tax return does not mean that a taxpayer has been careless’. They went on to say, ‘To levy a penalty on a taxpayer who hereto has had a good compliance record over many years and then refuse to consider suspension of those penalties does not reflect well on HMRC’.
As always thinking of the correct technical position makes sense.
In a recent case the tax payer, a Mr Sparrey proved he did not need to pay HMRC for an agreed tax underpayment. This was because as a PAYE liability, prima facie, the tax should have been accounted for by the employer.
The Tribunal found that the employer and their payment agent did not take reasonable care, so HMRC should not have directed the tax to be collected from the individual taxpayer. The latter had depended upon his employer to calculate the tax correctly and should not be penalised for their lack of care.
This case was not directly to do with Extra Statutory Concession A19, but it was mentioned, and may be of interest to those still arguing on past liabilities.
A number of underpayments we have seen have resulted from the misapplication of PAYE procedures by the employer. This new case emphasises that, in those circumstances, HMRC have very limited powers to transfer liability to an individual employee, away from the employer.
It may also provide food for thought on other arguments where HMRC seek recompense from individual employees which may fall more aptly on the corporate body.
Transfer of liability to an individual may occur where (Reg 72 Income Tax (PAYE) Regs 2003 – SI 2003/2682). The employer satisfies HMRC:
a) That they took reasonable care and
b) That the error to fully deduct was made in good faith
That the employee received the monies knowing that the employer had wilfully failed to deduct the amounts due.
Crucially, the employee has the right of appeal against an HMRC direction, so swift action and expert advice may be required.
The Construction Industry Scheme remains a difficult beast with which to comply.
Here at Eaves & Co in Leeds we are dealing with a case where tax was not deducted by a contractor on a certain category of payment to its subcontractors.
The case has been ongoing for a good of time and we have been introduced to mitigate the CIS tax exposure to the contractor. Our well considered case that the contractor took “reasonable care” in implementing the CIS has been put to HMRC. We await to hear whilst still claiming evidence that the subcontractors have actually paid all relevant taxes, which is the second line of defence.
Reasonable excuse is a well tested path in CIS terminology with a number of recent cases taken to Tribunal in attempt to avoid the consequences of non-CIS compliance. We expect our case of reasonable care to be thoroughly tested by HMRC.