30 December 2011
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Over 25,633 VAT decisions overturned in the last year
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Up from 53% of VAT decisions overturned in the 12 months since April 2009
Almost two thirds (65%) of all penalties and decisions issued by HM Revenue & Customs (HMRC) to taxpayers in relation to VAT matters are subsequently found to be incorrect and are overturned on internal review.
The result of reviews provided to us by HMRC shows that over the past year HMRC completed 39,551 reviews of VAT decisions imposed on businesses in relation to tax disputes and late filing/payment of tax, of which 25,633 were subsequently ruled incorrect.
The number of internal reviews of VAT decisions has more than doubled in the two-and-a-half-years since the reviews were introduced (April 2009). In the first year of the new review process, just 16,460 VAT decisions were reviewed at the request of taxpayers.
The increase in the number of penalties being reviewed, and the growing proportion which are wrong, is worrying because taxpayers normally assume HMRC’s decisions are correct and frequently do not feel confident enough to challenge its authority. It is likely that thousands more taxpayers will have paid fines which had been wrongly imposed.
The purpose of the internal review process is to resolve tax disputes quickly and inexpensively, thereby reducing the number of disputes which go to Tax Tribunal. Reviews typically take 45 days, and taxpayers who disagree with the outcome can then take the dispute to a Tax Tribunal.
The suspicion amongst taxpayers is that HMRC is putting VAT Officers under huge pressure to maximise revenues by issuing as many fines as possible. Under current rules, late payments should suffer no penalty if the taxpayer has a reasonable excuse whilst mistakes on VAT returns should suffer no penalty if the taxpayer takes reasonable care.
Simon Newark, VAT partner in our London office, comments: “These numbers are worrying. Penalties shouldn’t be thrown around like confetti and it suggests that Officers are really not adhering to the findings of the Courts in penalty cases. While it is encouraging that HMRC is prepared to correct its own mistakes, it really shouldn’t be making this number of errors to begin with.”
“The figures suggest that HMRC has been using the carelessness argument far too liberally to generate penalties. It would be understandable if a small percentage of fines were wrong, but for this many to be overturned by their own Review team is quite astonishing.”
“Not only has the volume of penalties and decisions sent for Review doubled but the proportion incorrectly applied has risen from half to almost two-thirds in just 18 months. HMRC clearly needs to exercise greater care itself and issue far fewer penalties.”
He adds: “How many taxpayers have been wrongly fined but trusted HMRC’s judgement and not pushed for a review?”
The total, 34% of technical decisions, which concern how tax law should be applied, are still being overturned on review.
Simon comments: “HMRC Officers should understand the law and apply it correctly in the vast majority of cases. Incorrect decisions can potentially destroy perfectly viable businesses. VAT is a very complex area of tax law, which most businesses do their best to comply with. When HMRC’s own Officers can’t get it right, why should businesses suffer?”
“HMRC’s review team is not truly independent and the suspicion is that they will support the original decision if they can and will only overturn decisions which are so blatantly wrong that they don’t have a leg to stand on. Many of the decisions which are upheld will only have the slightest justification or be marginal at best and HMRC is probably relying on taxpayers not having the time or money to pursue the matter further.”
He adds: “It can be very costly and time consuming for taxpayers even if a fine is overturned on review. HMRC does not reimburse the cost of contesting a decision which is wrong. It can cost thousands to take an appeal to the Tax Tribunal and HMRC know that many taxpayers will simply pay up despite the injustice. The current adversarial culture between taxpayers and HMRC is getting worse despite many exercises and consultations over the years”
“The lesson here is if you get a fine or a decision you are not happy with, be prepared to challenge it. The chances are it might be worth your while.”
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