It ain’t over until the fat lady sings

This peculiar phrase originated in the United States of America, but has come into popular use in the UK. It normally means the game is not over until the final whistle or something similar. But equally, we know that when the fat lady has sung (one attribution of the saying is that it came from a Wagner opera where the soprano took twenty minutes to wrap up the opera) the game is over. And so it is with tax.

In tax there are rules to the game and we do have a fat lady singing scenario, although as you’ll find out, in VAT at least, she can take two years to shut up. They apply to both sides, although sometimes you would be forgiven for thinking that the home side (HMRC for every match) sometimes loses sight of them. And sadly, the referee is not there at the time, and it is only later that you get to challenge the decision – without the use of a video referee.
There is also a set of rules about the length of the game. These are part of your rights as a taxpayer. I’m going to have a look at them using VAT as an example in this first article. A further article will follow about similar rules for direct taxation. And in a further article I’ll address the importance of penalty negotiations in this context. Finally, in my last article, I’ll look at what is meant by “evidence of the facts”.

So, let’s assume that HMRC has alleged that there is something wrong with a taxpayer’s VAT compliance, perhaps after a routine inspection. Let’s also assume that HMRC have got it 50% right, but that it has taken a very long time to get to this stage – on complex cases a couple of years is not unusual (and is why every taxpayer should have professional fee insurance cover).

For a regular error, the first rule relates to how far back HMRC can go with an assessment. This is four years from the end of the tax period concerned. It is also, incidentally, the time limit for a taxpayer to go back and make a repayment claim AND for voluntary disclosures where the taxpayer owes HMRC money.
So, let’s assume that a recurring error has been made since 1 January 2010, VAT periods end on 31 March, 30 June, 30 September and 31 December and that HMRC decides to assess on 2 June 2017. This means they can go back to the tax period ended 30 June 2013. The periods from 1 January 2010 to 31 March 2013 are out of time for HMRC to assess.

But there is another rule. HMRC must issue its bill within one year of the evidence of the facts sufficient to decide to assess or two years after the end of the tax period concerned. It is complicated, but let’s take the same basic example and add in one fact – HMRC knew about the error and could have assessed on 2 June 2015. This brings both the one year rule and the two-year rule into play. Under the one year rule, HMRC would be unable to assess at all – extra time has finished and they’ve failed to score. However, they then get to go to penalties, and this is where the two-year rule comes into play. This brings in all tax period ended within the previous two years, starting with the one ended 30 June 2015. However, they cannot go back earlier.

Ah, I hear you ask, what happens if the error was “careless” – surely HMRC can go back six years, like they do with direct taxation. No, they cannot. They are still limited to four years in VAT. However, the twenty year “deliberate” time limit does apply to VAT – so in our example, if this was, say, “cash no invoice”, then HMRC can assess right back to 1 January 2010. However, HMRC must still follow the one and two-year rule. We recently had a look at a case and it was clear that whilst the twenty year “deliberate” rule applied, HMRC had completely ignored the one and two-year rule, thus ruling out 18 years of assessments.

So, you can see, there are rules to the game, HMRC are not always as good as they should be at knowing those rules and abiding by them, but if you check out the application of the time limits legislation against the activities of HMRC on a particular case, as we do on every case, it is not unusual to find HMRC is breaking the rules of the game.

So, remember to check out whether the fat lady has sung.