Complexity and risk
“VAT is a simple tax…” said Anthony Barber, Chancellor of the Exchequer on the introduction of VAT on April’ Fool’s Day in 1973.
I think most would disagree with this statement, particularly those in the charities sector. The amounts involved can be significant, particularly in respect of construction projects. And if a self-assessed tax mistake is made, a penalty is likely to be levied unless a reasonable excuse (narrowly defined) can be provided and accepted by HMRC.
Challenging a decision by HMRC
Given the complexity of the legislation, it is common for charities and HMRC to disagree on the interpretation of some of the rules. If a charity disagrees with a decision by HMRC then there are some options.
Firstly, a reconsideration request can be made. This is normally referred to a team within HMRC’s Solicitors office who will review the decision to establish if it has been properly made. If the decision is confirmed, then the tax payer normally has the option to lodge an appeal to the VAT tribunal. To do so, the decision must be an appealable matter, which covers most routine matters. There can be a requirement to make payment of the disputed tax in issue before the hearing can proceed, and the process is fairly formal requiring submission of statements of case and directions. The case is also matter of public record, but reputational risk is low if the litigation is properly managed, and can be positive if the case is successful.
There are some matters that are outside the scope of the tribunal (for example the operation of an extra statutory concession) but it may be possible to apply to the High Court for judicial review.
Where litigation is involved the costs can be significant. You would normally want to appoint an advocate, and while there is an entitlement to self-representation this is something of a brave move. In a recent case there was some criticism of the representations made by the tax payer, undoubtedly not helping their case – which was almost inevitably unsuccessful.
One cost effective option is to apply for alternative dispute resolution (‘ADR’). This results in the exchange of statements relating to the matter, and then a discussion with HMRC facilitated by a mediator to try and find a resolution. This can be helpful when HMRC do not appear to have fully understood the facts. However, to enter ADR an appeal must have been made. This is then ‘stayed’ to allow ADR to proceed, and HMRC must agree the case is suitable for this process.
This all takes time, and there is no certainty of success. However, perseverance can pay off. We have several examples where an appeal resulted in a further review by HMRC’s lawyers, and the case dropped.
Recent example
One recent case (City YMCA London) saw the charity succeed against a decision by HMRC which allowed a better VAT treatment of hostel type accommodation. This was decided in the first tier VAT tribunal.
We are aware the same point was taken several years ago by a similar charity, but they were unable to persuade HMRC their view was incorrect. Unfortunately, the charity did not have the resource to take the matter forward. It is now out of time for further review and the VAT cost to the client in the region of £1m.
Summary
HMRC do not always get it right. The options to challenge HMRC’s decisions are important and should be considered. Taxpayer challenges do not always result in litigation, as frequently decisions are withdrawn or moderated. It is critical time limits are met otherwise the right for any review can be lost.
The next step
For further information please get in touch with your local UHY adviser.
