When the VAT at stake is significant, but HMRC will not listen to reason, a business might have no option but to appeal to the Tribunal. What is involved?
It is quite a shock for a business when HMRC raises a large VAT assessment against it, particularly if the business believes it has done nothing wrong.
The amount assessed is often a material concern for the business, as VAT is charged on the full sales price, not the business’ profits. At that point a challenge against HMRC’s decision is almost inevitable.
Consider a business using the Flat Rate Scheme (FRS), accounting for a flat rate of 13% as a hairdresser.
There are plenty of traps which might lead to an oversight and assessment by HMRC: the threshold for leaving the FRS; the most appropriate flat rate percentage to use; a change in the predominant business activity requiring a different flat rate percentage; the eligibility criteria; omission of exempt sales; and various other potential pitfalls.
In our example, HMRC has determined that the business has always been associated with another. The reason was quite obscure: 18 months prior to joining the Flat Rate Scheme, the business was closely linked to another and it had not sought HMRC’s written permission to join the FRS.
HMRC consider the business ineligible to use the FRS and assessed the business for a further 7% VAT liability, plus penalties and interest. Although the assessment will be capped at four years, the amount assessed is material at over £50k.
The business argued that it had been linked, but not associated with another business but after discussion, HMRC stood by its decision and its assessment of over £50k. What can be done?
Even at the stage of reviewing the business’ position and holding discussions with HMRC, it is important to consider an appeal to a tribunal. This is paramount for several reasons.
- Time limits
- Planning ahead
- Attitude in discussions with HMRC
- Decision from HMRC
There are only 30 days from the date of HMRC’s decision to lodge an appeal with the tribunal or request a review of their decision extending the 30 day period.
Sometimes a late appeal will be allowed but more often than not the Tribunal will want to review the reasons for a late appeal before allowing the case to proceed. Best practice is to ensure that the 30 day time limit is met or extended.
The 30 day time limit is not long. A business will want to consider the expense of attending tribunal and assess its chances of success. Generally costs are not paid even in the event of success. Time will be needed to draft the appeal and prepare a list of documentary evidence to be relied upon in court together with legal support.
Attitude in discussions with HMRC
If the business is willing to take its argument to tribunal, the argument must be set as strongly as possible, without compromise. It is important to state the case in a way which is suitable for presentation at a tribunal.
Decision from HMRC
It is important to be clear when a statement from HMRC constitutes a decision.
Sometimes HMRC are reluctant to issue a decision and the business will not want a tribunal to reject an appeal on the grounds that no decision has been made.
Equally, the business will not want to have received a vague statement from HMRC which turns out to be a decision and the 30 day time limit for an appeal has been exceeded.
Confirmation that HMRC have issued a decision should always be obtained where there is any doubt.
Appealing to Tribunal
Having received a decision from HMRC, the business can now appeal to the tribunal.
Appeals can be drafted and submitted to the tribunal service electronically. Subsequently, a list of documents and an agreed bundle of documentary evidence should be submitted to the Tribunal. It is very important to get the grounds of appeal correct. Remember the Tribunal will not have had the benefit of the discussions and statements made between the parties leading up to the appeal.
Unfortunately taking a case to Tribunal can be expensive in terms of professional fees which means that often a just case may not be taken. Additionally, the decision between the business representing itself or obtaining representation is carried out on the grounds of expense.
If the business is being represented, it is advisable for the person presenting the case at Tribunal to have some input on the wording of the grounds of appeal and the contents of the evidence bundle. After submission, there can be a delay of several months in obtaining a date for a hearing which can be subject to deferrals at the request of either party.
Appealing to a tribunal is often the only option for a business under a material threat from HMRC. Here it can then state its case as strongly as possible to someone who is independent of HMRC and its policies, in the pursuit of justice.