HMRC’s internal VAT review process tips in favour of HMRC over businesses

Publications that covered this story include City AM, 2 April.

  • Over half of all reviews of VAT decisions now rejected by HMRC

Businesses are losing out as HMRC’s internal VAT decision review process appears to be making decisions increasingly in HMRC’s favour.

Just 48% of businesses’ appeals against HMRC VAT decisions were upheld by HMRC’s internal review teams last year, far lower than the 60% of appeals upheld the year before*, raising concerns that HMRC has toughened its approach to the appeals process.

HMRC’s internal reviews re-examine VAT decisions imposed on businesses in relation to tax disputes and the late filing or payment of tax.

The purpose of the internal review process is to resolve tax disputes quickly and cheaply, reducing the number of disputes which go to the Tax Tribunal. Reviews take around 45 days, and businesses that disagree with the outcome can then take the dispute to tribunal.

Simon Newark, VAT Partner, London, says: “We were very pleased with the approach that HMRC took to internal VAT reviews when the system was first set up in 2009. HMRC dealt with reviews on a case-by-case basis and looked carefully at businesses’ claims.”

“However, recent anecdotal evidence in the tax and accountancy industry suggests that this approach has begun to change. The drop in successful reviews appears to support this.”

He continues: “Some worry that the combination of the pressure from the government on HMRC to increase revenues, and the cuts to HMRC’s budget, could be key factors at play here.”

“The concern is that this pressure is leading to HMRC’s review teams to either hurry through cases without looking as carefully at the details as they would before, or ‘rubber-stamp’ Officers’ decisions on far less solid grounds. This is leaving more of HMRC’s original VAT decisions unchallenged.”

Any decline in the standards of the internal review process will hurt businesses that may not be able to afford the cost of challenging HMRC VAT decisions at a tribunal.

Simon comments: “There is often a lot of scope to challenge an HMRC VAT decision, but many businesses can’t afford to go down the formal appeal route to a tribunal. This was one of the key reasons behind setting up the internal review process in the first place. A cost-effective, quick appeals process is crucial.”

“Even if businesses can afford to take HMRC to a tribunal over a VAT decision, the tribunals have a huge backlog of cases to get through. Cases taken to tribunal might not be heard for a while, leaving businesses in limbo as they await a decision.”

The fall in upheld appeals is unlikely to be because more of HMRC’s VAT decisions are correct in the first place.

Simon says: “There has been no evidence of significant improvements in the quality of HMRC’s decisions. Many VAT cases that have made it to the tribunal stage see success for businesses, with judges often criticising HMRC’s decision-making process and procedures.”

Despite the fall in successful appeals, it is still in a business’ interest to seek a review of a VAT decision that seems wrong.

Simon comments: “Particularly for smaller businesses, there is a tendency to assume HMRC’s decisions are correct, and therefore many of HMRC’s decisions can go unchallenged. However, as the statistics show, there is still an almost one-in-two chance that seeking a review of a VAT decision would be successful. It’s worth a try if you have solid grounds for your argument.”

12,092 appeals against VAT decisions were upheld by HMRC’s internal review teams last year, out of a total of 25,456 appeals reviewed. Within this figure will be both decisions by Officers and automatic penalty cases.

Proportion of successful appeals against HMRC VAT decisions falls

Graph (1)

*Year ending 31 December